Employers across the US, including in North Carolina, South Carolina, and Tennessee, have for years used the tool of the covenant not to compete, sometimes called “non-competes,” to ensure that information and skills developed throughout the term of employment are not used to the benefit of a competitor once an employee leaves the company. Recently, the Federal Trade Commission has determined that non-competes restrict the freedom of American workers, suppress wages, and stifle new businesses. Non-competes have historically blocked workers from taking a better job, negotiating better pay, or starting their businesses. Because of these reasons and the impact on the American economy, in April of 2024, the Federal Trade Commission announced a new rule banning covenants not to compete nationwide. This means that not only can an employer not create any new covenants not to compete with employees, but also that any existing covenant not to compete for most workers will become unenforceable.
What is a Covenant Not to Compete? A covenant not to compete, or “noncompete,” is an agreement between parties, often an employee and employer, where the employee agrees not to engage in any activity that would increase competition for the employer for a certain period. This could include prohibiting an employee from sharing trade secrets or privileged information with others, or it could prohibit an employee from working at a new similar company after leaving her old company. In the business contract context, a covenant not to compete could prohibit a business owner who sells her business from starting another business that could compete with the one she sold.
Until recently, covenants not to compete were legal in North Carolina, South Carolina, and Tennessee if they were necessary to protect an employer’s legitimate business interest and limited in terms of time and territorial reach. This is set to change starting in September 2024. Now, under the Federal Trade Commission’s new rule, existing noncompetes for most workers will no longer be enforceable after the rule’s effective date. Employers across the United States are now banned from having an employee agree to a noncompete.
When does this new rule go into effect and who is impacted? The Noncompete Ban goes into effect on September 4, 2024. For senior executives, existing non-competes can remain in force. For workers who are not senior executives, which makes up most of us, any existing noncompetes will be unenforceable after September 4, 2024. Not only can an employer not make an employee agree to any new covenant not to compete, but any previously agreed-to covenant not to compete will become unenforceable on September 4, 2024. This new rule also requires employers to notify workers whose noncompetes are no longer enforceable and to inform them that their noncompetes will not be enforced.
The new rule does include an exception that allows noncompetes between the seller and buyer of a business.
Once the rule becomes effective, individuals can submit information about a suspected violation of the rule to the Bureau of Competition. However, the Bureau of Competition and Federal Trade Commission cannot provide legal advice, take any legal action on behalf of private individuals, or answer questions about investigations. To take any legal action regarding a noncompete, an individual should reach out to an experienced attorney, such as one of the many experienced attorneys of King Law Offices.
If you are an employee who has signed a non-compete and would like to discuss your options concerning it, we are ready to walk you through your choices. Alternatively, if you are an employer or business owner who would like to discuss how the new ban on Non-competes may affect your business and alternative options going forward we are prepared to guide you through that process as well. Regardless of what position you find yourself in concerning Noncompete agreements, our talented and dedicated team of attorneys and case managers stand ready to assist you every step of the way. Call us today at (888)-748-KING (5464) to schedule a consultation at one of our offices.