The FTC had proposed a sweeping ban on most non-compete agreements, scheduled to take effect on September 4, 2024.  However, on August 20, 2024, a federal court in Texas struck down this proposed rule nationwide, ruling that the FTC lacked the statutory authority to enforce such a broad ban.

The proposed rule would have banned employers from forcing employees to sign a non-compete agreement, thus preventing them from working for any other employer after they concluded their employment.  Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas stated, “No state has ever enacted a non-compete rule as broad as the FTC’s Non-Compete Rule.”

State-Level Developments:

The FTC’s rule will not take effect for now, and employers can continue relying on non-compete agreements as state law allows.  However, A growing number of states have enacted full or partial bans on non-compete agreements, reflecting a trend toward limiting their use:

States with Full Bans:

  • California: Maintains a broad prohibition on non-compete agreements, making them unenforceable for nearly all employees.  Bans regarding trade secrets can be enforced.
  • Minnesota: Agreements before July 1, 2023, can be no broader than necessary to protect the ‘employer’s legitimate interests’ and not impose unnecessary hardship on the employee.’  After July 1, 2023, all non-compete agreements are fully banned.
  • North Dakota: Prohibits any contract that restrains anyone from exercising a lawful profession, trade, or business between employers and employees.  Bans regarding trade secrets can be enforced.
  • Oklahoma: Prohibit non-compete agreements that ‘restrain from exercising a lawful profession, trade or business of any kind,’ with a few exceptions.

States with Partial Bans or Restrictions:

  • Colorado: Agreements before July 1, 2023, can be no broader than  ‘reasonably necessary to protect trade secrets and limits on venue and choice of law.’  Non-competes cannot be used for anyone not ‘highly compensated’ ($123,750/annually in 2024).
  • Idaho: Non-compete agreements only with ‘key employees, defined as a person who has gained a high level of inside knowledge and influence with the company due to the employer’s investment of time, money, and trust in the employee.  A person is presumed to be a key employee if they are among the highest-paid five percent in the company.
  • Illinois: Agreements on or after January 1, 2022, are illegal and void unless
    1. The employee receives adequate consideration,
    2. The covenant is ancillary to a valid employment relationship,
    3. The covenant is no greater than is required for the protection of a legitimate business interest of the employer,
    4. The covenant does not impose undue hardship on the employee, and
    5. The covenant is not injurious to the public

Non-competes cannot be used for anyone not ‘highly compensated’ ($75,000/annually in 2024).

  • Maryland: Non-compete agreements are prohibited for all employees earning $46,800 annually, excluding overtime.  They are also prohibited for healthcare and veterinary workers providing direct patient care earning less than $350,000.
  • Oregon: Employees must receive written notice of the non-compete agreement a minimum of two weeks before starting employment.  In addition, the employee must meet the criteria for a salaried exempt employee whose annual income exceeds $113,241/annually in 2024.  The maximum length of non-compete agreements is 12 months.
  • Washington: Non-compete agreements are void against employees and independent contractors whose 2024 annual salaries are less than $120,559.99 and $301,399.98, respectively.
  • Washington, D.C.: Non-compete agreements are void against employees and independent contractors whose 2024 salaries are less than $154,200/annually and medical specialists earning $257,000/annually

Implications for Employers:

The FTC’s rule will not take effect for now, and employers can continue relying on non-compete agreements as state law allows.  However, the situation remains fluid, with potential appeals and further regulatory actions on the horizon.  Employers are advised to stay vigilant and ensure that their non-compete agreements are carefully tailored to comply with the state’s specific laws.

In light of these developments, experts recommend considering alternatives to non-competes, such as confidentiality agreements, trade secret protections, and non-solicitation agreements, to safeguard business interests without violating evolving legal standards.

By staying informed and proactive, HR professionals can help their organizations navigate the complexities of non-compete agreements in this rapidly changing legal environment.