Wisconsin employers should be aware of a new federal rule banning non-competes, which becomes effective later this year. Several businesses have already instituted litigation challenging the rule, so the future of this rule remains uncertain. Below are some tips to ensure compliance, especially for businesses who are currently negotiating employment contracts or considering non-competes or non-solicitation agreements for employees.
What is the FTC Non-Compete Ban? Does the new ban on non-competes impact my business?
The Federal Trade Commission (FTC) announced that starting September 4, 2024, nearly all non-compete clauses will no longer be enforceable. This new rule applies to all future employment contracts starting September 4 and almost all currently existing contracts, subject to a few exceptions. This new rule applies to businesses of all sizes.
A non-competition clause (“non-compete”) prevents an employer’s employees from leaving the business and starting a new business, or in some other way directly or indirectly competing with the employer’s business. These non-compete clauses often prevent those employees from doing so at a certain distance from the employer’s business and for a certain amount of time (for example: the employee “cannot start a similar business within Washington County for 2 years”). The FTC has now determined that these non-compete clauses create an unfair method of competition, which the new rule will make illegal.
The FTC estimates that roughly one in five workers, that is, 30 million Americans, are restricted by a non-compete clause.
What are the exceptions to the Non-compete Ban?
There are two prominent exceptions of which employers should be aware. (Non-competes which are permitted under these exemptions will still be governed by Wisconsin state law.)
- Exception: Senior Executives – Existing Non-Competes
First, existing non-competes with senior executives who are in a decision-making position and who had a total annual compensation of $151,164 or more over the past year will remain in effect despite the ban. To be in a decision-making position, a person must have policy-making authority. To have policy-making authority means that a person has the final authority to make policy decisions that control significant aspects of a business entity—this must be more than authority that is limited to advising or exerting influence over such policy decisions. Additionally, having final authority over a subsidiary or an affiliate alone is not considered policy-making authority for the parent company.
Note that this exception does not apply to senior executives who meet these criteria and who sign non-competes after September 4, as those will still be banned under the new rule.
- Exception: Sale of a Business
The second exception is when a person sells a business. A non-compete may be permitted to restrict the seller of a business when they are selling a business entity, disposing of all their ownership interest in the business, or selling all or substantially all of the business’s operating assets. Any such exempted non-compete must be made “pursuant to a bona fide sale,” which is one made in good faith as opposed to, for example, a transaction whose sole purpose is to evade the new rule. Generally, the FTC considers a bona fide sale to be one that is made between two independent parties and in which the seller has a reasonable opportunity to negotiate the terms of the sale.
There is no percentage ownership requirement. For example, a selling owner could be restricted by a non-compete if they owned as little as 10%.
Employer Obligations Under the New Rule
Employers do not need to formally rescind all of their contracts with their employees who have non-competes. The employer simply cannot enforce the non-compete clause. The employer must also give clear and conspicuous notice to all employees who have non-competes that the employer will not be enforcing the non-compete after September 4. To satisfy this notice requirement, an employer may draft its own notice, hire an attorney to do so, or use the model language provided in the new rule. This notice must identify the worker who entered the non-compete and be in writing. This notice can be on paper and be hand delivered or sent by mail, or the notice may be sent over email or text message.
Our Recommendations
All existing non-compete agreements should be reviewed.
When reviewing your agreements, consider whether what you really need is a non-compete, or something like a non-disclosure agreement (NDA) or non-solicitation agreement. Employers concerned about protecting valuable information may still enter non-disclosure agreements with their employees. These are also commonly called confidentiality agreements and are contracts or clauses within contracts where a party agrees not to disclose or use information designated by a business as confidential, such as a list of clients’ private personal information. However, NDAs must be carefully drafted, as overly broad NDAs could be viewed as preventing workers from seeking or accepting other work or starting a business after they leave a job, functionally acting as a non-compete which would violate the new rule. For example, an NDA that bars a worker from disclosing, in a future job, any information that is “usable in” or “relates to” the industry in which they work, or an NDA that bars a worker from disclosing any information or knowledge the worker may obtain during their employment whatsoever, including publicly available information, could be unenforceable; these types of NDAs are so broadly written that, for practical purposes, they function to prevent a worker from working for another employer in the same field and are therefore non-competes.
There is currently litigation challenging this new rule: the litigation argues that the FTC does not have the authority to determine what counts as an unfair business practice and that the FTC can only enforce what Congress determines to be an unfair business practice. If successful, this could result in the rule being struck down or changed such that you may still be able to implement non-competes. However, businesses should be prepared for the rule to take effect and should stay updated. We will continue to post updates on our website, so be sure to check back or follow us on LinkedIn or Facebook for updates before taking action.
Questions?
If you have questions about this article or need assistance, please contact this article’s authors or one of our business law attorneys at Schloemer Law Firm, S.C at [email protected] or 262-334-3471.
We frequently represent individuals in their legal matters, focusing primarily on providing business, real estate, and estate planning legal services in Washington, Ozaukee, Dodge, and Fond du Lac County and the communities of West Bend, Jackson, Slinger, Hartford, Kewaskum, and other surrounding communities.
Originally published: July 1, 2024.
Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected].