August 21, 2024 Update: The FTC’s Ban on Non-Competes will no longer take effect on Sept. 4, 2024. Please refer to the article Federal Trade Commission’s Ban on Non-Competes Blocked for more information.

The ban on non-competes

On Tuesday, April 23, the Federal Trade Commission (FTC) issued its highly-anticipated final rule banning non-compete agreements. Generally, non-competes are agreements or provisions in a contract that prevent a worker from taking a new job or starting a new business. The four major components of the FTC’s rule banning non-competes are:

1. Employers would be banned from entering or attempting to enter into non-complete agreements with their workers and includes independent contractors, externs, interns, apprentices, volunteers and any sole proprietor providing a service. The ban applies not only to non-compete agreements but also to non-compete clauses that are in employee handbooks and workplace policies.
2. Employers would be banned from enforcing existing non-compete agreements, unless those agreements cover certain senior executives (those earning more than $151,164 annually and are in policy-making positions).
3. Agreements such as non-disclosure, non-solicitations, no-business and training-repayment agreements, and even liquidated damages provisions that are written so broadly as to have a functional effect of prohibiting or penalizing a worker from seeking or accepting other work or starting a business after the employment ends are also banned.
4. Before the effective date of the rule, employers must provide explicit written notice (mail, email or text) to current and former workers, other than senior executives, under an existing non-compete that their non-competes are no longer in effect. The FTC provides model language that employers can use when giving the required notice.  Employers using the model language will be deemed to have complied with the rule’s notice requirement.

An exception to this rule is that non-competes are allowed when entered into for a bona fide sale of a business or the sale of a person’s ownership interest in the business. Additionally, employers already exempt from the FTC’s jurisdiction under the FTC Act (for example, banks, federal credit unions, common carriers, air carriers, and certain nonprofits) are not subject to the non-compete ban.

The rule will take effect 120 days after it is published in the Federal Register (“Effective Date”), or sometime after August 22, 2024.  Litigation, however, could delay or even block the rule from taking effect. The U.S. Chamber of Commerce and a Texas business have already filed lawsuits seeking to strike down the rule arguing that the FTC lacks the statutory authority to issue such a rule.

Existing limitations on the use of non-competes

Although the future of the FTC’s rule remains to be seen, employers in Hawaii should not forget about the limitations on the use of non-competes under existing state law. Non-competes (and non-solicitations) for employees of a technology business have been banned in Hawaii since 2015. HRS §480-4(d). For non-technology businesses, employers may use a non-compete if it is “ancillary to a legitimate purpose” and “reasonable.”  HRS §480-4(c). Protecting the business from added competition is not a legitimate purpose. Prudential Locations, LLC v. Gagnon, 506 P.3d 132 (2022). Moreover, non-competes are not reasonable if: (1) it is greater than required for the protection of the employer; (2) it imposes an undue hardship on the employee; and (3) the benefit to the employer is outweighed by the injury to the public. Technicolor, Inc. v. Traeger, 551 P.2d 163 (1976).

Finally, employers may also want to consider the May 23, 2023 memo from Jennifer Abruzzo, the National Labor Relation Board’s (NLRB) General Counsel, in deciding when and how to use non-competes. The memo posits that overbroad non-competes are unlawful because they chill employees from exercising their rights to take collective action to improve their working conditions under Section 7 of the National Labor Relations Act. Some examples given in the memo of the chilling effect of overly broad non-competes include: (1) discouraging employees from concertedly threatening to resign to demand better working conditions because the employer would view these threats as futile since the employees’ ability to seek employment elsewhere are limited; (2) discouraging or preventing employees from seeking or accepting employment with a competitor to obtain better working conditions; and (3) discouraging or preventing union organizers from joining a company for the purpose of organizing workers because they would not be able to leave and join the next organizing target. While General Counsel Abruzzo’s memo is not binding law or legal precedent, it does direct regional offices to look for non-competes in their investigations and seek input from the NLRB’s Division of Advice as to whether an unfair labor practice charge should be issued against companies. Consequently, the memo may serve as a preview of future NLRB decisions involving non-competes.

Recommended practices for non-competes

With all of the above in mind, employers can take certain steps now to confirm compliance with state non-compete law and prudently prepare for the FTC’s rule, even with the uncertainty of its enforcement.

1. Review your strategy for using non-competes. Under state law, a one-size-fits-all strategy may not be sufficient. Requiring all employees to sign non-competes may make it difficult for an employer to show that the non-compete is reasonable and ancillary to a legitimate purpose if challenged in court. A non-compete for a salesperson may be justified whereas one for those performing administrative functions may not. Along those lines, given the NLRB GC’s stance on non-competes, you might consider not using non-competes for non-supervisory and lower wage earners unless absolutely critical.
2. Consider using other restrictive agreements to protect proprietary information. Other alternatives to non-competes such as non-disclosure and non-solicitation agreements may be sufficient to protect your company’s proprietary information without the need for a non-compete. Work with your attorney, however, to ensure that such agreements will pass the FTC’s “functionality” test since even those agreements may come under future agency scrutiny.
3. Review your policies and training with regards to protecting your proprietary information. Don’t assume having restrictive agreements in place with employees is enough to protect your trade secrets and proprietary information. You should still have internal processes in place limiting access to proprietary information to only those who need it and training employees on the proper handling and use of proprietary information. This exercise could also help you narrow down the list of employees for which non-competes might be needed.  
4. Take inventory of all existing and new non-competes (including non-compete clauses in your employee handbook and workplace policies). Spend some time identifying all existing non-competes for current employees and past employees as well as track any new non-competes you enter into going forward. This will make the process of notifying past and present employees that their non-competes will not be enforced easier if the FTC rule goes into effect in 120 days. Remember, this notice must be provided before the Effective Date so the current litigation over the rule makes the timing and necessity of providing this notice a little tricky. Employers should be prepared to be able to send the notice quickly once the fate of the FTC rule becomes more certain. Also make a note of those employees that qualify as a “senior executive” under the FTC rule. Notice for this group will not be required since non-competes with senior executives can still be enforced if the non-compete existed before the Effective Date.  Finally, make a note of all documents such as employee handbooks and workplace policies that contain non-compete clauses since these clauses will need to be stricken once the FTC rule goes into effect.

HEC will monitor this situation and provide appropriate updates. Contact your HR Consultant, Labor Relations Consultant, or our Hotline if you have any questions regarding the rules covering non-competes.