Depending on how a federal court in Texas rules, employers nationwide might have to send, by Sept. 4, a notice to all workers with non-compete clauses declaring that their non-competes are no longer legally enforceable.
Whether companies will have to deliver the notice hinges on a judge’s decision in the U.S. District Court for the Northern District of Texas. In July, that judge blocked enforcement of the rule when it was challenged by a tax services firm in Texas. Several organizations that joined with the plaintiff asked the judge to block the FTC for enforcing the rule nationwide. The judge has said she would decide by Aug. 30.
If the judge extends her enforcement injunction, employers across the country won’t need to do anything. But if she declines, employers will have to scramble to send out the notice. (Here’s the FTC’s suggested language.)
Various business groups have been protesting the FTC’s non-compete ban ever since the final rule was issued in April. The rule prohibits employee non-compete agreements with limited exceptions, including non-competes entered into as part of the sale of a business as well as existing non-competes entered into by senior executives who earn more than $151,164 a year. (New non-competes with senior executives would be barred.) In addition, the ban doesn’t apply to non-competes between businesses.
News reports suggest the FTC’s main target was non-competes involving workers like hairdressers, who often are required to sign non-competes as a condition of employment. The FTC estimates 18% of all U.S. workers are covered by non-competes, and in many cases those non-competes are keeping them from making more money and/or starting their own businesses.
This rule is likely to face many more court challenges. While they monitor the judicial rulings, employers should audit their existing agreements to see if they’re affected by the new rule and should consider drafting a notice in case the rule takes effect on Sept. 4.