Shannon S. Pierce
The Federal Trade Commission (FTC) issued a final rule that will void most non-compete agreements across the United States, with the ruling to take effect this September. This landmark regulation, approved by a 3-2 vote, will have far-reaching implications for both employers and employees in Nevada. Understanding these changes and preparing for their impact on the labor market is crucial for all stakeholders.
The FTC states they enacted this ruling to promote competition by banning non-competes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.
Soon after the FTC announced its final regulations, lawsuits were filed by the U.S. Chamber of Commerce and other interested parties asking for a court to declare the FTC regulations to be unconstitutional and to otherwise enjoin them from taking effect. If the FTC regulations are allowed to go into effect, then a substantial number of existing non-competes will need to be eliminated, and entering into new non-competes will be unlawful in most cases.
The Role and Impact of Non-Compete Agreements
In the right context, non-competes can serve important interests. For example, where an employee has access to critical trade secrets and proprietary information of a company, a non-compete is an important tool that businesses have historically used to prevent the employee from resigning, joining a competitor, and using and disclosing the company’s trade secrets for the benefit of the competitor. These agreements typically restrict employees from engaging in similar work within a certain geographic area and for a specified period. The rationale behind non-competes, in a context such as this, is to safeguard proprietary information, trade secrets, and customer relationships that employees might possess.
In Nevada, non-competes have especially been relevant in industries with high levels of innovation, such as the tech industry. By restricting employees from transitioning to competitors, companies have aimed to preserve their competitive edge.
However, there are certainly times when businesses are unable to identify a legitimate business interest sufficient to justify enforcement of non-competes. When applied too broadly, non-competes can prevent workers from pursuing better career prospects and prioritizing professional development.
There are also public policy considerations to account for. For example, if the enforcement of non-competes would deny the public access to critical services, Nevada’s public policy serves as a bar to enforcement of non-competes in that circumstance. This balanced approach aims to ensure that non-competes are used appropriately and do not burden employees or the broader public in Nevada.
Implications of the FTC's New Rule
The FTC's new rule represents a significant shift in the regulation of non-compete agreements. As a general rule, employers will not be able to enter into new non-competes with employees unless those non-competes are entered into in the context of the sale of a business. Looking at non-competes that are already in effect as of September 2024, if the employee is a senior executive, the non-compete can remain. For all other employees, employers must affirmatively send notice to such employees informing them that their non-competes will no longer be enforceable.
This change is expected to have several key implications for employers and employees in Nevada. First and foremost, the invalidation of non-competes will enhance employee mobility. By removing barriers to re-employment, the FTC’s rule intends to increase this by eliminating bars to workers seeking re-employment. That being said, employees remain bound to honor confidentiality agreements and non-solicitation agreements, and the theft, use, and disclosure of trade secrets remains unlawful.
Sector-Specific Considerations in Nevada
The impact of the FTC's rule will vary across different sectors in Nevada. While the regulation does not introduce industry-specific rules, certain industries are likely to be more affected than others. An example of this is sectors with high turnover rates or those that rely heavily on specialized skills, the invalidation of non-competes may pose significant challenges.
The FTC elected not to make industry-specific rules. Nevada law already prohibits employees who receive solely an hourly wage and workers who have been laid off from a lack of work to be subject to non-competes. This law is expected to have the most impact on mid-level salaried employees.
Preparing for the New Regulations
Between now and September, businesses would be well advised to use the intervening time to assess which non-competes are in effect, determine whether they can remain in effect after September, identify other contractual protections that the company can implement to protect trade secrets and proprietary information, and prepare the required notices informing the appropriate employees of the eradication of their non-competes. As always, each of these inquiries is fact-intensive, and as such, companies would benefit from consulting their employment counsel in this effort.
The FTC's ban on non-compete agreements represents a significant shift in employment law, aimed at fostering greater employee mobility and the ability to take ideal job opportunities to continue their professional development. Assuming they are not overturned by the courts, employers in Nevada must proactively adapt to these changes to ensure they protect their business interests while complying with these new legal requirements. By taking strategic steps now, businesses will be able to navigate these new regulations and continue to operate effectively in a competitive business market.
Shannon Pierce is a Fennemore director who practices primarily in the areas of employment defense and commercial litigation. Licensed in Nevada and California, she has nearly 20 years of experience litigating on behalf of management concerning claims of employment discrimination, wrongful termination, leaves of absence, and other traditional employment and commercial litigation.
