Navigating the Future of Non-Compete Agreements: What Employers Need to Know

Apr 1, 2024 | Business Law, Legal Update, News

Navigating the Future of Non-Compete Agreements: What Employers Need to Know

UPDATE – April 30, 2024

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that effectively bans non-compete agreements nationally. The vote was 3-2, with the dissenting commissioners arguing that the FTC does not have the authority to create the ban.

When the rule goes into effect, all new non-compete agreements will be unenforceable. Existing non-competes will become unenforceable except for those that apply to senior executives, defined as persons in policy-making positions earning over $151,164 per year. Employers will have to give notice to workers bound by non-competes (except for those who fall into the senior-executive exception) that the employer will not enforce them.

The rule is scheduled to go into effect 120 days after it’s published in the Federal Register, though legal challenges could delay or, ultimately, undermine it. The day after the FTC issued its final rule, the US Chamber of Commerce filed a lawsuit in federal court in Texas challenging the FTC’s authority to make such a rule. Within two days of the rule’s publication, two private companies also filed challenges, and more are expected to follow.

Meanwhile, in New York State, it’s not yet known whether state legislators will go ahead with their previously reported plans to reintroduce a tailored version of the noncompete bill that Governor Hochul had vetoed in December 2023.

Hochul had said she wanted a non-compete ban to apply only to workers making less than $250,000. If state legislators do reintroduce a bill, the question remains whether they will attempt to compromise with the Governor by putting in an income limit. That may make the state bill weaker than the federal version. Alternatively, they might revise the state bill to be more in line with the federal rule.

In June 2023, both houses of the New York State legislature passed a bill to prohibit non-compete agreements. However, on December 7, Governor Hochul vetoed the legislation after negotiations to narrow the bill’s scope broke down.

As drafted by the legislature, the bill created a blanket ban on new non-compete agreements for employees of all income levels, with only extremely limited exceptions.

Wall Street firms, business groups, the New York City Bar Association, and others lobbied against the bill, trying to stop it from passing altogether or at least keep it from applying to employees who made more than $250,000 per year. The governor indicated she was in favor of this limitation, but the bill’s sponsor did not agree on the details of whether the salary cap included benefits and bonuses.

Although they were not able to reach a compromise this time, state lawmakers have said they would try again with similar legislation, and the governor appears ready to approve a more limited form of the ban.

National Movement Against Non-Compete Agreements for Low-Wage Workers

There’s a national trend against non-compete agreements, especially for low-wage workers.

In 2018, the attorney general of Washington State filed a lawsuit against the national sandwich chain Jersey Mike’s for its no-poach clauses. These provisions prohibit employees from moving between different franchise locations of the chain, which keeps wages down for low-paid sandwich makers.

Jersey Mike’s settled for $150,000 and agreed to stop enforcing the clauses. A similar multistate effort, led by Massachusetts and including the New York State AG, obtained settlements from Burger King, Popeyes, Tim Hortons, and other restaurant chains to stop using no-poach agreements.

About 50% of states, including California, Minnesota, Oklahoma, and North Dakota, already have strong bans against non-compete agreements. Meanwhile, the FTC proposed a new rule that would create a broad nationwide ban against non-competes not only for employees but also for independent contractors. And, unlike the recently vetoed New York bill, the FTC’s rule would be retroactive, voiding all existing non-competes. The FTC will decide soon, in April 2024, whether to implement the rule.

Current Landscape of Non-Competes in New York State

According to Attorney General James, non-competes are only allowed and enforceable in New York if they are necessary to protect an employer’s legitimate interests, do not impose undue hardships on employees, do not harm the public, and are reasonable in time and geographic scope.

Governor Hochul’s Stance

In a statement accompanying her veto, Governor Hochul wrote, “I have long supported limits on non-compete agreements for middle-class and low-wage workers,” and that she had, in the past, proposed banning them for anyone making less than New York’s median wage. She also acknowledged that companies have “legitimate interests that cannot be met with the Legislation’s one-size-fits-all approach.”

She remains committed to finding a solution that would “recognize the urgent need” to restrict non-competes for middle- and low-income workers and stated she is “open to future legislation that achieves the right balance.”

The Future of Non-Compete Legislation in New York

The State Senate sponsor of the vetoed non-compete bill said that he would be introducing a new bill. Given Governor Hochul’s statement, the Democratic supermajority in both houses of the State Legislature, and how close the governor and legislature apparently were to reaching an agreement, it seems likely that a ban on non-competes will pass, if not for all workers, than for those up to a yet-to-be-determined threshold income level.

Implications for Employers

Non-compete clauses are one way to protect an employer’s confidential information and trade secrets. Since it appears there’s a good chance that some form of a law banning non-competes will be implemented in New York State in the not-too-distant future – and possibly nationally as well if the FTC rule passes – employers should get ready now. They need to look into alternative methods for protecting their intellectual property and confidential information, including:

  • Non-solicitation agreements (protecting customer lists)
  • Trademark registrations
  • Patents
  • Copyright registrations
  • Well-drafted confidentiality and trade secret agreements
  • Other adequate protection measures for confidential information and trade secrets

Alternatives to Non-Compete Agreements

Non-solicitation agreements provide an alternative way to protect a company’s clients and workforce. These agreements, which were permitted under the proposed legislation, are less restrictive than non-competes. However, it’s important to carefully craft these agreements to ensure that they are both effective and enforceable in New York.

Employers should also consider having employees sign non-solicitation, confidentiality and nondisclosure agreements, implementing applicable policies and training, and restricting employees’ ability to take documents with them via email or external devices.

What’s Next?

In New York, the attorney general, governor, and legislature have all worked in some form towards limiting the enforceability of non-compete agreements for low- and middle-income workers. Legislation banning new non-compete agreements for workers who earn less than a specified threshold, possibly $250,000, has a good chance of passing. Given these likely changes, New York employers should start considering alternatives to non-compete agreements that will protect their trade secrets and confidential information.

The FTC may also be implementing a non-compete rule in the near future that will apply nationally and could be even stronger than what the New York legislature will propose. The situation is very much in flux, and employers everywhere in the country should take note.

The information provided in this blog entry does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this blog entry is for general informational purposes only. Information in this blog entry may not constitute the most up-to-date legal or other information. Reading or using the information in this blog entry does not create an attorney-client relationship with Kavinoky Cook LLP.