Simon PLC Attorneys & Counselors – July 2024 Memorandum
NON-COMPETE AGREEMENTS IN 2024, MICHIGAN, FTC, AND THE CHEVRON RULE
Recently, the Federal Trade Commission (“FTC”) announced the implementation of a new rule, effectively banning non-compete agreements from the landscape of employment related contracts. The new rule seeks to correct what the FTC views as a stifling of workers’ ability to freely move between jobs. The FTC believes that non-compete clauses “[k]eep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” The final rule aims to “ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
Under the new rule, existing non-compete agreements for the majority of workers will no longer be enforceable after going into effect. A very narrow exception, however, has been carved out for so-called “senior executives” who comprise less than 0.75% of all workers in the FTC’s estimation. While existing senior executive agreements will be allowed to remain in force, going forward employers will be prohibited from entering into or attempting to enforce any new non-compete agreements. Employers will further be required to provide notice to workers, apart from senior executives, who are subject to an existing non-compete agreement that they will not enforce it against them. In order to assist with this requirement, the proposed rule includes model language employers can use to communicate with workers.
“Senior Executive” is defined by the FTC as a person occupying a “policy making position” and who received total annual compensation of at least $151,164 in the preceding year (annualized if the employee has not worked a full year). The income test is fairly broad and encompasses salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation, but excludes such items as benefits, lodging and certain other discretionary payments. As far as the second prong of the senior executive test, the FTC considers the following to in a “policy making position:” President, CEO, or equivalent; any other officer (Vice President, Secretary, Treasurer, CFO, etc.) who has policy-making authority or any other person who has policy-making authority for the business. Key to the analysis as to whether or not a current agreement can continue to be enforced is the authority to make final policy decisions affecting significant aspects of the business – an officer acting in a mere advisory capacity, or whose authority is limited to a particular area or department of the business, will likely be outside of the scope of the new rule’s exception.
The FTC voted in April to approve the issuance of the proposed rule 3-2; the final rule is set to become effective, 120 days following its publication in the Federal Register, on September 4, 2024. Though Michigan anti-trust law currently permits non-compete contracts in certain limited circumstances, Michigan’s Attorney General has praised the new FTC rule stating: “My office has seen firsthand the detrimental impact non-compete agreements have on Michigan workers, hindering their ability to explore better job opportunities in a tight labor market.” “This FTC ruling bolsters workers’ rights and will have a positive impact on the economy.”
Of course, as with any significant departure from previous federal rules and guidelines, court and/or regulatory challenges can be expected. The Supreme Court has very recently abandoned its longstanding precedent of according a high degree of deference to regulatory agency decision making as established in the landmark 1984 decision Chevron USA Inc v Natural Resources Defense Council, Inc. The nation’s highest court’s June 28th opinion in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce signals a shift towards greater scrutiny of the dictates of executive agencies such as the FTC, replacing the traditional deference with a requirement that reviewing courts exercise independent judgment as to whether or not the agency has acted within the bounds of its appropriate sphere of rulemaking authority as expressly delegated by Congress.
Indeed, Michigan’s Court of Appeals has, against the backdrop of current legislation, shown a willingness to give effect to non-compete agreements, especially where such agreement is limited in duration and concerns an employee in a position to steer potential business currently in the pipeline to a new employer: “[T]he noncompete agreement protected a reasonable business interest and defendant provided no evidence to suggest it restricted wage growth or stifled employee mobility. Thus, the trial court did not err in finding the noncompete agreement enforceable and in granting summary disposition in plaintiff’s favor.” Matthews-Hargreaves Chevrolet Co v Desantis, Unpublished, No. 365052, May 23, 2024).
While it is likely that the new rule’s implementation may be stayed or its provisions significantly altered by the courts or the FTC itself, it is nevertheless, it is important to take stock of the number of non-compete agreements that are outstanding and determine which employees meet the definition of “senior executive.” Any senior executives identified without existing non-compete agreements should enter into them before the new rule is set to go into effect on September 4, 2024. With regard to employees for whom existing non-compete agreements will become unenforceable, be sure to have on hand the information that will be required to provide them with proper notice under the Rule. We at Simon PLC Attorneys & Counselors are standing by to provide guidance on the new rule, including up to the minute regulatory or judicially-imposed revisions, or answer any other questions regarding non-compete agreements you may have.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.
