On May 7, 2024, the FTC (Federal Trade Commission) published a new law on non-compete agreements. This law effectively bans all non-competes between employers and employees, including the existing ones, due to being unfair. According to the FTC, these agreements harm employees, limit their potential, and restrain them from looking for a new job or starting their own business.

This non-competition ban will come into force 120 days following the publication in the Federal Register. It’s expected to reshape the labor market in Houston, impacting millions of American employees and businesses in all industries. Higher wages, lower healthcare expenses, fair competition, and job mobility are the main predicted outcomes of the law.

Non-Compete Agreements: Their Meaning and Impact on the Houston Labor Market

Non-competes are a common feature of employment contracts produced by US employers that can prevent employees from leaving the company for a new job or starting their own business. It has been contended that non-compete agreements coerce employees to stay at their current job (even when they want to leave) at the risk of legal or financial consequences. Some claim that employees are unfairly forced to switch to a lower-paid job, relocate, defend against expensive litigation, or leave the workforce.

Additionally, some speculate that non-compete agreements negatively impact the American economy by keeping wages low, preventing the rise of new startups, and suppressing new ideas.

What Is the FTC Non-Compete Ban?

FTC’s ban on non-competes will forbid, if it goes into effect, the use of new non-compete agreements between employers and employees and ceases the validity of existing ones. FTC defines non-compete agreements as an unfair method of competition that violates section 5 of the FTC Act.

This rule applies to employment terms and conditions that “prohibit a worker from, penalize a worker for, or function to prevent a worker from” looking for or accepting a job or operating a business in the U.S.

If this new rule if upheld and does into effect, it won’t be legal for Houston employers to enter a noncompete agreement with employees on or after the regulation’s tentative effective date – September 4, 2024.

The rule also requires all employers to notify their employees who have an existing non-compete that their agreement is no longer in force. Employers will no longer be able to enforce any existing non-competes they have with employees.

Who Does the New FTC Non-Compete Ruling Include?

The new FTC rule applies to all workers in Houston, TX, paid and unpaid employees, solopreneurs, and independent contractors, banning all existing and future non-competes. However, there’s an exception for senior executives with an existing noncompete agreement.

For senior executives, the existing non-competes remain in force. The term “senior executive” refers to employees in a policy-making position who earn over $151,164.

Are There Any Exceptions to the Non-Compete Ruling in Houston?

Yes. Apart from the abovementioned partial exception on senior executives, the ban also doesn’t include franchisees, referring to the franchisee-franchisor relationship. But it includes their employees.

Businesses outside the FTC’s jurisdiction are another exception to the rule. This includes banks, federal credit unions, loan and savings institutions, common carriers, air carriers, and some non-profit organizations in Houston.

Lastly, the FTC ban doesn’t apply to non-competes between a business's buyer and seller. This is done to protect businesses with partners and shareholders. Any non-compete agreements limited to the ownership of a competing business or its assets are valid. With it, an ex-partner or shareholder may not own or be a partner in competitors or their assets but may work for one.

What Are the Benefits of FTC Non-Compete Ruling?

The new rule is expected to improve the U.S. economy and workers’ lives. According to FTC, the non-compete ban is expected to bring about the following results in Houston:

• Increased wages: It’s estimated that workers’ wages would increase by $400-$488 billion over the next 10 years, which is $524 per worker per year.
• Lower healthcare costs: Experts foresee a reduction in physician services of $74-194 billion over the next 10 years.
• New businesses growth: It’s expected that 8,500 new businesses will be created each year, which means a 2.7% increase in the rate of new firm formation.
• Increased innovation. FTC estimates that each year, there would be 17,000-29,000 more patents, which is about 3,000 to 5,000 new patents in the first year of the non-compete ban. This is an increase of 11-19% per year over a period of 10 years.

The Ban on Non-Compete Agreements To Improve Lives of Houston Workers

Among all the benefits the FTC ban on non-competes has on the U.S. economy, improving millions of workers' lives is the greatest.

Around 30 million Americans have signed a noncompete agreement. This means the new rule could let many take more direct control of their employment situation, allowing them to switch to a better, higher-paid position, start a business, or offer a new idea on the market and prosper.

The salaries of Houston workers could also increase, and their healthcare costs could be reduced, allowing them to earn more money, save some, and live better lives.

Alternatives to Non-Compete Agreements as Solutions for Protecting Texas Businesses’ Investments

FTC identifies several alternatives to non-compete agreements employers in Houston, TX may use to protect their businesses without using a non-compete.

Non-disclosure agreements (NDAs) and trade secrets allow business owners/employers to protect their proprietary and sensitive information. They may also leverage confidentiality agreements, business policies, and practices to ensure their proprietary information.

Non-solicitation agreements are another route for business owners, though they may not remain lawful as they may possibly be classified as non-competes. The expanded definition by the FTC on non-competes includes clauses preventing client solicitation if they are broad enough to be interpreted as a means to discourage workers from seeking and accepting a new job. However, since non-solicits don’t prohibit employees from searching for a job at competing businesses, it may remain possible to use them as an alternative to non-compete agreements moving forward.

Another alternative for employers who want to keep their employees is to offer them higher wages and better working conditions.

FTC Non-Compete Ban: What Should Houston Employers Do Now?

The FTC non-compete ban is tentatively set to come into force on September 4, 2024, though challenges in the courts mean its future is uncertain. Once in effect, employers will be expected to notify their workers that their non-competes are no longer valid. Employers should keep an eye on Ryan LLC v. FTC, a case contesting the legality of the FTC's new ban, as it might lead to a delay or changes in the non-compete ruling.

Ryan LLC, a global tax company that uses non-competes with its employees, sued the FTC for banning non-compete agreements and categorizing them all as unfair and anti-competitive. The firm argues that the FTC overstepped its legal authority with its new rule. Judge Brown has postponed the date of the non-compete ban’s effectiveness, with a final decision set to be made before or on August 30th.

No one knows for sure what will happen and how the outcome of this case will impact the FTC’s regulation of non-compete agreements. Employers should follow the final ruling on August 30th to determine their next step.

FTC’s Non-Compete Ban Comes Into Force: What Should I Do?

Whether you’ve been asked to sign a non-compete agreement or you’re an employer who’s not sure how to prepare for the upcoming FTC non-compete ban, it’s advisable to consult with a business lawyer in Houston, TX.

Our business attorneys are experienced with non-competes and are here to help you with any challenges you may face due to the ban. Whether you need to protect your business and defend your right to operate as you always did or learn more about the FTC law, our Houston non-compete lawyers would be more than pleased to answer all your questions related to the regulation.

FAQ

Are Texas non-compete agreements enforceable, and how?

While FTC’s ban on non-competes doesn’t allow employees to enter into a noncompete agreement with Houston employees, Texas state laws remain unchanged. To be enforceable, a non-compete must meet specific criteria, such as to be included with another agreement (e.g., employment offer), be exchanged for something (e.g., training or confidential information), and must specify the limitations and restriction of the scope of activity, duration, and geographic area.

What would happen if I violated a non-compete agreement in Texas?

There’s no simple answer to this question. First, the agreement must be reviewed to see what it includes and if it's reasonable in scope. This means its scope of activity, duration, and geographic scope are specific. Also, the individual circumstances must be considered to identify the reason for breaking the noncompete agreement in Houston, TX.

However, if the court proves you have violated the non-compete without any valid reason for doing so, it may award the employer monetary damages and/or injunctive relief.

Is a non-compete agreement valid if you are laid off?

It depends on the state. Some states automatically nullify non-compete agreements if employees are laid off, while others don’t. According to Texas state laws, non-compete agreements are valid regardless if the employee quit, was fired, or was laid off. However, the reason for ending the employment may be a factor in seeking non-compete enforcement.

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