In addition to staying current with the constant changes to federal and state laws and regulations concerning RV sales and financing, you must remember changes that could affect other parts of your business, such as your relationship with your employees and senior executives.
On April 23, the Federal Trade Commission (FTC) voted to finalize a new rule banning employers from enforcing noncompete clauses against workers nationwide. The FTC determined noncompete clauses are now apparently an unfair method of competition and, therefore, violate Section 5 of the Federal Trade Commission Act.
The final rule prohibits employers from entering into a new noncompete clause with workers and enforcing existing noncompete clauses with workers other than senior executives.
Regarding senior executives, the final rule adopts a different approach to existing noncompetes entered into before the effective date. For senior executives, existing noncompetes can remain in force, while existing noncompetes with other workers are not enforceable after the effective date.
The final rule bans employers from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. The rule includes an exception providing noncompetes between a business’ seller and buyer.
Here is a look at some key definitions within the rule.
What Is a ‘Noncompete Clause’?
A noncompete clause is a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
Seeking or accepting work in the U.S. with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
Operating a business in the U.S. after the conclusion of the employment that includes the term or condition.
The term or condition of employment includes a contractual term or workplace policy, whether the term or policy is written or oral.
Who Is a ‘Worker’?
As you might expect, the definition is extremely broad.
A “worker” is a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal laws. This includes whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice or a sole proprietor who provides a service to a person.
The definition also includes a natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.
Who Is a ‘Senior Executive’?
The final rule defines the term “senior executive” as workers earning more than $151,164 who are in a “policy-making position.” The FTC included positions such as an entity’s president, CEO, or any other officer or officer-like position of a business that has policy-making authority in the definition.
The FTC estimated fewer than 1% of workers are senior executives under the final rule.
Now, let us look at some reasons behind the FTC’s rulemaking.
Why Did the FTC Issue This Rule?
The FTC claimed several reasons for its decision to issue the noncompete rule. For starters, the FTC asserted noncompete clauses restrict American workers’ freedom and suppress wages. The agency claimed noncompete clauses restrict workers from freely leaving their current employer for a higher-paying job or to start their own business. The FTC claimed noncompetes prevent workers from accepting higher-paying jobs by restricting workers from moving freely.
The FTC also claimed noncompetes reduce the wages of workers who are not subject to noncompetes. Further, the agency claimed noncompetes negatively affect competitive conditions in labor markets by inhibiting matching between workers and employers.
The FTC said its final rule will lead to 2.7% annual growth in new business formation, creating more than 8,500 additional new businesses each year. Finally, the FTC said the final rule will help drive innovation. The agency estimated this supercharged innovation would lead to an annual average increase of 17,000 to 29,000 more patents for the next 10 years.
If you are an employer, the final rule requires you to provide clear and conspicuous notice to workers, other than senior executives who are bound by an existing noncompete clause, that you cannot and will not enforce the noncompete clause against them. The notice must identify the person who entered into the noncompete clause with the worker. The notice can be on paper and delivered by hand to the worker, mailed to the worker’s last known personal address, emailed to the worker’s email address, or texted to the worker’s mobile telephone number.
The final rule provides model language employers can use to notify employees. Using the model language provides a safe harbor.
What Are Your Options?
The FTC claimed employers have several alternatives to noncompetes to protect companies’ investments without enforcing a noncompete clause.
The FTC said trade secret laws and non-disclosure agreements (NDAs) provide employers with well-established means to protect proprietary and other sensitive information, such as customer lists and other trade secrets.
As a final piece of advice, the FTC said rather than using noncompetes to lock in workers, employers wishing to retain employees could compete on the merits of the worker’s labor services by improving wages and working conditions.
What Will It Cost?
The penalties for failure to comply with the final rule are severe. The maximum civil penalty for Section 5 violations is $51,744 per violation. The final rule is scheduled to be effective Sept. 4, 2024.
However, after the FTC’s announcement, separate lawsuits were filed in the Northern District of Texas, Eastern District of Texas and Eastern District of Pennsylvania challenging the rule.
The Eastern District of Texas case was stayed and transferred to the Northern District of Texas. The plaintiffs in the Northern District of Texas case filed a motion to stay the rule’s effective date, as did the plaintiff in the Eastern District of Pennsylvania.
Whether the rule’s effective date will be stayed or go into effect remains to be seen, but do not assume the rule will be stayed and ignore your compliance responsibilities come Sept. 4.
If you are an employer who uses noncompete clauses with your workers and senior executives, now is the time to schedule a meeting with your counsel to discuss the FTC’s final rule and your next steps.
Eric L. Johnson is a partner in the Oklahoma City office of Hudson Cook, LLP. He helps banks, credit unions, and RV and auto dealers with nationwide mortgage and auto finance programs; online vehicle sales; and electronic payment programs.
