Shot of a notebook and pen on a desk in an office Beginning on September 4, all U.S. employers will be prohibited under federal law from entering noncompete agreements with their workers, according to a new rule issued by the Federal Trade Commission. What does that mean for Washington businesses, executives, and employees?
Blog Post

What Does the Noncompetes Ban Mean for Small Businesses?

  • Date Posted: June 11, 2024

Beginning on September 4, all U.S. employers will be prohibited under federal law from entering noncompete agreements with their workers, according to a new rule issued by the Federal Trade Commission. What does that mean for Washington businesses, executives, and employees?

We’ve pulled this brief to inform you about how noncompetes work, the rule banning them, and how recent news may affect the ban’s rollout for Washington businesses.

What are noncompete agreements?

Many people sign a noncompete with their onboarding packet at a new employer. While most know they’ve signed one, they don’t always know what they say.

According to the National Employment Law Project, noncompete agreements (NCAs) are employment contracts that prevent workers from working for “competitor” companies during or after their current employment. They typically restrict workers from competing for a period of time, in a specific industry and/or geography. Sometimes, noncompetes prevent workers from starting their own competitor companies.

On April 23, the Federal Trade Commission (FTC) announced a final rule banning NCAs as an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act for employers to enter into noncompetes with workers.

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” the FTC’s announcement said. They “often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”

The commission projects that 30 million workers—nearly one in five Americans—are subject to a noncompete. It also forecasts the elimination of NCAs will result in more than 8,500 additional new businesses created each year.

 What’s required of employers under the new rule?

Companies can still use non-disclosure agreements (NDAs) to protect trade secrets, proprietary information, or other sensitive information. FTC researchers estimated that more than 95% of workers with a noncompete have an NDA as well.

Aside from the ban, the FTC now requires employers to inform workers with existing noncompete clauses that they are no longer enforceable. While the rule allows employers to retain existing noncompetes for senior executives, employers cannot enter into (or enforce) new noncompetes with senior executives unless they fit the definition provided below.

How does the FTC rule differentiate between workers and employees?

NCAs are banned for all workers, whether they are employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a person. The FTC also defined a worker as any “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.”

The FTC also provided a few key exceptions. For one, a worker is not “a franchisee in the context of a franchisee-franchisor relationship.” And, it allows companies to require NCAs for senior executives who are in “policy-making positions” and receive compensation above the following thresholds:

  • Total annual compensation of at least $151,164 in the preceding year; or
  • Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
  • Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a noncompete clause.

The FTC included salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during that 52-week period in its definition of total annual compensation, but it does not include board, lodging, payments for medical insurance, payments for life insurance, contributions to retirement plans, or the cost of other similar fringe benefits.

As finalized, the FTC rule will eliminate NCAs for all but 1% of all U.S. employees unless the legal challenges succeed in changing or derailing it.

What legal challenges?

On April 24, the U.S. Chamber of Commerce filed suit against the FTC ruling.

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” the U.S. Chamber’s announcement said. “We’re suing the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”

The Chamber maintains that noncompete agreements “serve vital procompetitive business and individual interests—like protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements.”

The Chamber also maintains that the FTC has overreached by hitting mute on the laws of 46 states that permit noncompete clauses, the Chamber said. NCAs “have traditionally been an issue of state law,” it said in its explanation for the suit. “So far this year, 25 bills addressing noncompetes have been introduced in 17 state legislatures.”

How do noncompetes work in Washington now?

Washington has restricted noncompetes since 2020, according to the law firm Perkins Coie.

Perkins Coie said the state prohibited their use in 2020 unless:

  • The worker earns more than $120,559.99 for employees and $301,399.98 for independent contractors in 2024. (The minimums are adjusted annually.)
  • The noncompete is effective for no more than 18 months unless the business shows a longer duration is necessary.
  • The noncompete is disclosed in writing at the time of hire or is supported by additional consideration such as a pay raise or bonus. It is not enough to exchange continuing employment for an employee’s signature on a noncompete after they are hired.
  • If the employer lays off the employee, at the time of termination, the employer must pay the employee the equivalent of their base salary for the duration of the noncompete enforcement period.

Now, according to new state requirements outlined in the Substitute Senate Bill 5935  beginning June 6, the latest amendment to Washington state laws expands the definition of a noncompete and narrows the definition of a customer nonsolicitation. It also narrows exemptions for selling a business.

Should challenges to the FTC rule succeed in court, employers and employees in Washington can read the firm full coverage of the latest addition to state law provided by Perkins Coie here.