By: Monika Herrera, Sheats & Bailey, PLLC
FTC BAN
On April 23,2024, the Federal Trade Commission (“FTC”) issued its final ruling banning noncompete clauses across the United States. The FTC’s new rule comes into effect September 4, 2024.
The FTC defines noncompete clauses as follows: a term or requirement in an employee contract that forbids, fines, or prevents a worker from (i) looking for or taking a job in the United States with another individual, where the job would start after the employment that contains the term or condition ends; or (ii) continuing to run a business in the U.S. following the conclusion of the job that contain the term or condition.
Prior to this act noncompete clauses acted as a barrier to shield businesses from employees who might seek to exploit confidential information gained through their employment to start a competing business. Noncompetes were common practice across many industries to protect their trade secrets and to keep a competitive advantage. The FTC’s new rule strips businesses of this protection.
The FTC’s ruling bans new noncompetes for all workers including senior executives and invalidates prior noncompetes for all workers, except senior executives. Existing noncompetes for senior executives remain enforced. The FTC defines senior executives as employees that earn at least $151,164 and are in policy making positions. Policy making position refers to a business’ president or chief executive officer or officer equivalent with final authority to make policy decisions over the enterprise such as restructuring, company expansion through mergers or acquisitions, and resource allocation.
In addition, noncompete agreements entered into by a person pursuant to a bona fide sale of a business entity are exempt from the ban by the FTC. According to the FTC, a bona fide sale is one in which the seller has a reasonable opportunity to negotiate the terms of the sale and is made between two independent parties at arm’s length. State law will control the noncompetes permitted by the bona fide sale exception.
IMPACT ON CONSTRUCTION BUSINESS
The construction industry relies on skilled talent and strong relationships. The FTC’s new rule is broad and applies to all employees and independent contractors. Noncompete clauses have allowed contractors to protect their proprietary information and methods, things like bidding practices/formulas and project management techniques.
Contractors who relied on noncompete clauses to prevent workers from leaving the company and utilizing the information gained while working at the company must now find alternative ways to protect confidential information.
The ban on noncompetes could leave contractors vulnerable to the sharing of their valuable information regarding customers and business development strategies. To stay ahead of the curve companies should look into alternative strategies for protecting proprietary information. Intellectual property protections such as trade secrets are legal tools for protecting valuable information. In order to satisfy trade secret requirements businesses should consult with an attorney to enact the necessary measures.
Although noncompete clauses are no longer valid there are other restrictive covenants that can be used. A non-disclosure or non-solicitation agreement can still protect certain aspects of the business. A non-disclosure agreement keeps workers from revealing confidential information learned through their employment to other companies, but it does not prevent them from quitting to work for a rival company or starting their own business with that knowledge in mind. A non-solicitation agreement prohibits an employee from leaving the company and taking other employees or clients with them after their departure. Both NDA’s and non-solicitation agreements can lessen the harm caused by the FTC’s new rule.
Businesses that wish to safeguard themselves moving forward should consider adding these kinds of clauses to their employee contracts and handbooks. Consult an attorney to guarantee compliance with the new rule and prevent such revisions from appearing as a noncompete.
MOVING FORWARD
In order to be compliant with the ruling, employers must provide clear notice in writing to their employees that they are no longer bound by noncompetes by September 4, 2024, and should remove noncompete clauses from all employment documents. There is a lot of resistance from companies and business groups to the FTC’s authority to remove all active noncompete agreements from millions of employee contracts. There are currently two lawsuits pending, one of which is from the U.S. Chamber of Commerce to contest the enforceability of the new rule.
At this point in time businesses should monitor the progress surrounding the ruling and whether a court will delay its enforcement. In the meantime, employers should understand how this rule affects their businesses and seek protective measures.
For more information or assistance contact Sheats & Bailey, PLLC, Tel: (315) 676-7314, www.TheConstructionLaw.com.
The information provided in this article is not intended to serve as specific legal advice for any particular situation. Competent legal and experienced counsel should be consulted.