Category Archives: Noncompetes

Recent Developments in U.S. Employment Law: Top 5 Issues for 2024

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As we move through 2024, several key developments in U.S. employment law are poised to impact employers and employees alike. Here are the top five issues shaping the landscape:

  1. Overtime Pay Expansion
    The Department of Labor (DOL) has proposed changes to the Fair Labor Standards Act (FLSA) that would increase the salary threshold for overtime pay eligibility. The new rule would raise the threshold to $55,068 annually, making an additional 3.6 million workers eligible for overtime pay. The rule, if implemented, will require employers to adjust their payroll practices to ensure compliance​.
  2. Non-Compete Agreements Under Scrutiny
    The Federal Trade Commission (FTC) is advancing a rule to ban non-compete agreements. This proposed rule aims to void existing non-compete clauses and prohibit future agreements. The rule has generated significant debate and legal challenges, with final decisions expected later this year. Employers should review their contracts to prepare for potential changes​.
  3. Joint Employer Status
    The National Labor Relations Board (NLRB) has revised the standard for determining joint employer status. The new rule, effective February 26, 2024, broadens the criteria to include indirect and reserved control over essential employment terms. This change means that businesses could face increased liability for labor practices of their contractors and franchisees​.
  4. Minimum Wage Increases
    Several states and localities have enacted minimum wage increases effective January 1, 2024. Employers need to adjust their payroll systems to comply with these new rates​.
  5. OSHA’s Expanded Reporting Requirements
    The Occupational Safety and Health Administration (OSHA) has introduced new reporting requirements for high-hazard industries. Effective January 1, 2024, businesses with 100 or more employees in certain sectors must submit detailed injury and illness records electronically. This rule aims to enhance workplace safety transparency and accountability​.

These developments reflect a broader trend towards greater worker protections and regulatory oversight. Employers should stay informed and proactive in adapting to these changes to ensure compliance and foster a fair and safe working environment.

New FTC Rule Targets Non-Compete Clauses: Key Implications and Ongoing Legal Battles

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The Federal Trade Commission (FTC) has introduced a transformative rule that fundamentally alters the landscape of non-compete agreements in the United States. Published in the Federal Register on May 7, 2024, the rule is set to take effect on September 4, 2024. This sweeping regulation prohibits employers from entering into non-compete agreements with most workers, aiming to eliminate what the FTC views as an “unfair method of competition.”


Overview of the Final Rule

The Final Rule broadly defines a non-compete clause as any employment term that prevents or penalizes a worker from seeking or accepting work with another employer or starting a business in the U.S. after their current employment ends. This applies not only to employees but also to independent contractors, externs, interns, and volunteers. The FTC’s prohibition targets both new non-compete agreements and existing ones, making them unenforceable after the effective date.

Prohibitions on Existing and New Non-Compete Agreements

While the rule applies comprehensively, it carves out a specific exception for “senior executives.” These are defined as individuals earning at least $151,164 annually and holding policy-making positions. Employers can maintain existing non-compete agreements with these senior executives, but cannot enter into new ones post-September 4, 2024. This exception, however, is quite narrow and applies only to those who meet stringent criteria regarding compensation and decision-making authority.

Noteworthy Exceptions

Bona Fide Sale of a Business: Non-compete clauses associated with the genuine sale of a business entity remain permissible. The FTC defines a bona fide sale as one conducted in good faith between independent parties with the opportunity for negotiation, excluding agreements tied to stock repurchase rights or mandatory redemption programs.

Other Post-Employment Restrictions: While the rule does not explicitly ban non-disclosure agreements or non-solicitation agreements, it prohibits any post-employment restriction that effectively functions as a non-compete. Thus, overly broad or onerous restrictions could be scrutinized under this rule.

Garden Leave Arrangements: These arrangements, where an employee remains employed and compensated during a notice period, may be allowed if they do not impose post-employment restrictions. Careful drafting is essential to ensure they do not act as de facto non-competes.
Pre-Effective Date Breaches: The rule allows for enforcement actions related to breaches of non-compete agreements that occur before the effective date.

Pre-existing Causes of Action: Employers can still enforce non-compete clauses if the cause of action related to the non-compete accrued before the rule’s effective date​

Notification Requirement

Employers are mandated to notify affected workers in writing that their non-compete clauses are no longer enforceable. This notice must be delivered individually by hand, mail, email, or text message before the rule’s effective date. The FTC has provided model notices to facilitate compliance with this requirement.

Ongoing Legal Challenges

The implementation of the Final Rule is not without contention. Since its publication, multiple lawsuits have been filed challenging the FTC’s authority. These legal battles argue that the FTC overstepped its constitutional and statutory authority. They also assert that non-compete agreements traditionally have been governed by state law. These challenges will likely result in prolonged litigation, creating uncertainty about the rule’s final implementation and enforcement​

The NLRB’s Evolving Stance on Employment Noncompete Agreements

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The National Labor Relations Board (NLRB) has taken a clear stance on employment noncompete agreements, challenging their legality under the National Labor Relations Act (NLRA). The NLRB General Counsel’s memorandum, released in May 2023, asserts that such agreements infringe upon employees’ rights outlined in Section 7 of the Act. This development has far-reaching implications for both employers and employees, prompting a reevaluation of traditional employment practices.

The NLRB argues that overbroad non-compete agreements violate the NLRA by impinging on employees’ ability to exercise their Section 7 rights. These agreements, which traditionally aim to protect employers’ investments in employee training and intellectual property, are potentially unlawful when they restrict workers from engaging in collective action to improve working conditions. The memorandum specifically highlights instances where non-compete agreements hinder employees from seeking alternative employment, thereby limiting their bargaining power during labor disputes and undermining solidarity among workers.

The NLRB emphasizes that non-compete provisions are problematic when construed by employees as denying them the freedom to quit or change jobs, limiting their access to other employment opportunities commensurate with their skills and preferences. This denial of access has potential ripple effects, such as a weakened bargaining position during labor disputes and a loss of solidarity among workers.

The GC’s opinion is not currently settled law, but it is being implemented into NLRB policy. For example, a recent NLRB complaint alleges that a medical clinic violated the NLRA by imposing non-compete and non-solicitation provisions on employees, hindering their ability to engage in certain activities for 24 months post-employment termination. The NLRB now seeks to rescind these agreements.

Are Non-Competes Enforceable in Virginia?

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For years, companies have required that new employees sign covenants not to complete as a way blocking them from seeking work with competitors. If taken to an extreme, these provisions can substantially limit employment opportunities for workers in their chosen field within their own locality. As of 2020, Virginia law now protects “low wage” employees from being restricted in their future employment.

As defined by the statute, a “covenant not to compete” means a covenant or agreement, including a provision of a contract of employment, between an employer and employee that restrains, prohibits, or otherwise restricts an individual’s ability, following the termination of the individual’s employment, to compete with his former employer. the new lay strictly prohibits employers from requiring or enforcing non-competes for low wages employees and provides a private cause of action for violations.

A “low wage employee” means an employee whose average weekly earnings are less than the average weekly wage of the Commonwealth as determined pursuant to subsection B of § 65.2-500. In 2022, that number was set at $1,290 or $67,080 annually.

Not everyone is covered by the new law. Besides those who earn in excess of the threshold, the law does not cover persons whose earnings are derived primarily from sales commissions, incentives, or bonuses paid to the employee by the employer. The law also does not apply retroactively to persons who signed non-competes prior to 2020.

Blue Penciling of Non-Competes in Virginia?

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Non-competition agreements, AKA non-competes, are presently enforceable in Virginia provided that they are drafted in terms that are reasonable with regard to duration, geography and scope.  [Update: Virginia law now limits non-competes to employees meeting higher wage thresholds. 2020]. When a non-compete is facially unreasonable because it is vague or overbroad with regard to one of those components, Virginia Courts will refuse to enforce the entire restrictive covenant.

Enter the concept of “Blue Penciling …  Blue Penciling is a practice where a Court can in effect redraft or “limit” unreasonable terms of an agreement in a manner that would make the agreement otherwise acceptable and enforceable.  Virginia Courts have never endorsed this practice, though it is permitted in other states.  As a result, Virginia employers typically do not get a second chance to reform an unreasonable agreement.

Enter the concept of “Choice of Law” …  Virginia law does permit contracting parties to elect or choose the law of the State that applies to their contract, provided that it does not offend Virginia public policy.   In the case of Edwards Moving and Rigging, Inc. v. W.O. Grubb Steel Erection, Inc., the Richmond U.S. District Court was presented with a non-competition agreement that stipulated to the application of Kentucky law – a State that does permit Blue Penciling.   While the Court was not asked to reform the agreement in the context of a 12(B)(6) Motion to Dismiss, it did hold that Kentucky’s Blue Penciling policies were not repugnant to the public policies of Virginia, thereby opening the possibility that a Virginia Court could consider Blue Penciling at a later stage in application of Kentucky law.