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

The recent federal court ruling striking down the Federal Trade Commission’s (FTC) rule banning non-compete agreements has left many employers breathing a sigh of relief. However, this does not mean that non-compete agreements are free from scrutiny. State legislatures across the country have been increasingly hostile to these agreements, implementing various restrictions and outright bans over the last few years. Employers must stay informed about these changes to ensure compliance and avoid potential legal pitfalls.

Federal Ruling Overview

On August 20, 2024, a federal judge ruled that the FTC exceeded its statutory authority in attempting to implement a nationwide ban on non-compete agreements. The court found the rule to be arbitrary and capricious, emphasizing that the FTC lacked the power to create such sweeping regulations. As a result, the rule, which was set to take effect on September 4, 2024, is void, and existing non-compete agreements remain enforceable under federal law.

State-Level Actions

Despite the federal ruling, state laws governing non-compete agreements continue to restrict their use. Here are some notable state-level efforts:

1. California: Long known for its stringent stance, California continues to ban non-compete agreements except in very limited circumstances, such as the sale of a business.
2. Minnesota: In 2023, Minnesota joined the ranks of states imposing an all-out ban on non-compete agreements for employees, making it the fourth state to do so, along with California, North Dakota, and Oklahoma.
3. Colorado: Colorado passed a law effective August 2022 that significantly restricted non-competes, added a private right of action, and made it a misdemeanor to threaten to enforce an unenforceable non-compete.
4. Illinois: In 2022, Illinois restricted non-compete agreements for employees earning less than $75,000 per year, reflecting a growing trend to protect lower-wage workers.
5. Oregon: Over the last several years, Oregon has increased the burden on employers to enforce non-competition agreements, including by limiting their use only for high-wage, exempt employees (making approximately $110,000 at the time of termination), reducing their duration to 12 months after termination, and requiring employers to provide employees a copy of the non-compete within 30 days of termination.
6. Nevada: In 2021, Nevada prohibited non-compete agreements for hourly workers, narrowing the scope of enforceable agreements.
7. Washington: Washington is one of many states to restrict non-compete agreements to high-wage earners (employees making at least approximately $120,000), and it has also extended restrictions to independent contractors making at least $300,000. Additionally, in June of this year, a new law in Washington took effect requiring employers to disclose the terms of non-compete agreements at the time of hiring and limiting all non-solicitation agreements to current (as opposed to prospective) customers. Washington also imposes a financial penalty and attorneys’ fees for efforts to enforce non-compliant agreements.

What’s Next?

These recent state-level efforts may be a harbinger of what’s to come. In the 2024 legislative session alone, the following states introduced legislation attempting to fully prohibit or further restrict the use of non-compete agreements: Arizona, California, Colorado, Connecticut, Georgia, Illinois, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nebraska, New Jersey, New York, Pennsylvania, Rhode Island, Tennessee, Utah, and Washington. Some of these states may even try to mirror the FTC ban on non-competition agreements. 

Congress, too, may get involved at the federal level and attempt to enact federal legislation to achieve what the FTC could not and to ban—or at least limit—non-competes on a national level.  Even if legislators fall short of an outright ban, we expect efforts to further curtail non-competes, such as by continuing to raise the salary threshold for employees, imposing industry-specific prohibitions (the health care industry is a common focus), prohibiting their use for independent contractors, or further reducing their temporal scope.

What Can Employers Do?

Employers may be rightfully concerned about how they can protect their proprietary and confidential information if they are not permitted to prevent employees from taking their information and experience to competitors. But important tools to protect your company’s crown jewels do remain. Even under the FTC rule and state laws limiting non-competes, employers are still permitted to require nondisclosure agreements and protect trade secrets and confidential information—and pursue legal action if those rights are violated.  Employers may also be able to craft non-solicitation agreements that prohibit former employees from soliciting customers or employees to join a competitor. 

Employers must navigate this complex and shifting legal landscape carefully. It is crucial for employers to review and, if necessary, revise their non-compete agreements to ensure they comply with applicable state laws.  Employers should also consult with legal counsel for advice on how to protect themselves with nondisclosure or non-solicitation agreements, where applicable under state law. By doing so, they can protect their business interests while adhering to the evolving legal standards.