(CN) — The Federal Trade Commission’s decision to invalidate virtually all employee noncompete agreements — including ones already in place that cover 30 million workers — will mean big changes in the workplace as businesses seek new ways to protect themselves against employees taking valuable information when they leave to join a rival.
If the ruling goes into effect, “things will change in a way this area of law hasn’t changed for hundreds of years,” said attorney Dawn Mertineit of Seyfarth Shaw in Boston. “It’s a complete sea change. It will be a time of great upheaval.”
During the four months before the ruling is slated to go into effect in early September, employers will be scrambling to analyze which — if any — current agreements might still be enforceable and updating agreements to try to make them enforceable. Employers will also be preparing to rely more heavily on other types of agreements that are still legal — such as nondisclosure and trade-secret agreements, contracts not to solicit customers or employees, nondisparagement clauses and training-reimbursement contracts — but all these come with downsides and new legal issues stemming from the FTC’s action.
Longer-term, businesses will begin locking down their workplaces and making it much harder for employees — even executives — to access any information that’s not strictly necessary to do their jobs.
The FTC voted 3-2 on April 23 to issue a nationwide, retroactive ban on noncompetes, which now cover some 18% of the U.S. workforce. Currently only four states — California, Minnesota, North Dakota and Oklahoma — ban such agreements, although a number of others restrict them in some way.
Employers don’t have to formally rescind their noncompetes, but they are supposed to send a notice to affected employees before the effective date in early September saying the agreements are unenforceable. However, three lawsuits have already been filed to block the rule, including one by the U.S. Chamber of Commerce. Most employers will wait until the last minute to send out the notices in the hope that the rule will be struck down or put on hold before then.
Many businesses “have spent decades and millions of dollars learning about customer preferences, pricing, margins and manufacturing methods,” Mertineit said, and they fear that their hard-won information will now walk out the door and be used against them.
The FTC rule contains an exception for “senior executives” if they have a noncompete agreement in place as of the effective date, so some companies will hurry to try to create such agreements before September. But “who’s going to sign one now?” asked Clifford Atlas of Jackson Lewis in New York.
If a business requires new hires to sign a noncompete over the summer, “executives might not want to join the company until things are clear,” noted Ani Huang, CEO of the HR Policy Association’s Center on Executive Compensation.
There’s also a question as to who qualifies as a “senior executive.” The rule says it’s someone who earns at least $151,164 a year and has “final authority to make policy decisions that control significant aspects of a business.”
The $151,164 minimum includes base salary and nondiscretionary bonuses, but not discretionary bonuses, health and life insurance or retirement contributions, said Isaac Linnartz of Smith Anderson in Raleigh, North Carolina.
Also, a “year” can mean the last 52 weeks, the last fiscal year, the last calendar year or the last year following the anniversary of the executive’s hire date. An executive must earn $151,164 under all four tests for the agreement to be enforceable, Linnartz said. “It can be a close call and you might need an accountant.”
