BUSINESS       LAW

The Federal Trade Commission (FTC) has issued its final rule banning noncompete clauses in employment contracts, set to take effect on September 4, 2024. This landmark regulation marks a significant shift in employment law and aims to foster a more competitive and innovative labor market.

Comprehensive Ban on New Noncompete Agreements

Under the new rule, the FTC prohibits employers from entering into noncompete agreements with all workers, including senior executives. This regulation is rooted in the FTC’s authority under Section 5, which designates unfair methods of competition as illegal. By eliminating noncompete agreements, the FTC aims to remove barriers that hinder worker mobility and stifle competition.

Different Approach for Existing Noncompete Agreements

The rule differentiates between existing noncompete agreements for senior executives and those for other workers. For senior executives, defined as workers in policy-making positions earning more than $151,164 annually, existing noncompete agreements can remain in effect. However, for workers other than senior executives, existing noncompete agreements will become unenforceable after the rule's effective date. Employers must provide clear notice to affected workers that their noncompete agreements will no longer be legally binding.

Anticipated Economic Impact

The FTC projects significant economic benefits from banning noncompete agreements. Reduced healthcare costs are expected, with an estimated $74-194 billion reduction in spending on physician services over the next decade. The ban is anticipated to boost new business formation by 2.7%, resulting in approximately 8,500 new businesses annually. Innovation is expected to rise, with an increase of 17,000-29,000 new patents each year, and innovation growth is projected to accelerate over the next decade. Worker earnings are expected to increase by $400-$488 billion over the next ten years, with average annual earnings rising by approximately $524 per worker.

Alternatives to Noncompete Agreements: Non-Solicitation and Confidentiality Covenants

As noncompete agreements are phased out, employers could consider alternative contractual protections such as well-drafted non-solicitation and confidentiality covenants. These agreements can effectively safeguard business interests without restricting employee mobility.

Non-solicitation covenants prevent former employees from soliciting clients, customers, or other employees for a certain period after leaving the company. When carefully drafted, these covenants can protect an employer's client base and workforce from poaching while still allowing employees to work in their field.

Confidentiality agreements, also known as nondisclosure agreements (NDAs), prohibit employees from disclosing proprietary information, trade secrets, and other sensitive data. These agreements are crucial in protecting intellectual property and maintaining a competitive edge.

Invention Assignment Clauses

Employers could also consider implementing invention assignment clauses, often referred to as "shop-right" clauses. These provisions require employees to assign any inventions or intellectual property developed during their employment to the employer. Such clauses ensure that the company retains ownership of innovations created by its workforce, safeguarding its intellectual property rights.

Enforcement and Compliance

Upon the rule’s effective date, market participants can report suspected violations to the FTC’s Bureau of Competition. Employers must notify workers with existing noncompete agreements that these agreements are no longer enforceable. This notice must be clear, conspicuous, and provided in a manner accessible to the worker, such as hand delivery, mail, email, or text message.

Exceptions and State Laws

The rule allows certain exceptions, such as noncompete agreements tied to the bona fide sale of a business and pre-existing causes of action. It also preserves state authority and private rights of action, ensuring that state laws providing greater protection to workers remain intact.

Conclusion

The FTC’s final rule on noncompete agreements is poised to reshape the employment landscape by enhancing worker mobility, fostering competition, and driving economic growth. As businesses and workers prepare for the September 4, 2024, implementation date, the rule promises to unlock new opportunities and efficiencies across the labor market.

Employers could proactively adjust their employment agreements, focusing on non-solicitation and confidentiality covenants, along with invention assignment clauses, to protect their interests in the absence of noncompete agreements. These alternatives provide robust protection for businesses while supporting a dynamic and open labor market.

For more information please contact John Mark Hongs, Esq., Westminster Legal Group LLC

The U.S. Department of Labor made a significant announcement today regarding a final rule for independent contractors aimed at enhancing clarity for both employers and workers in determining worker classification under the Fair Labor Standards Act. This rule is designed to address the ongoing issue of employee misclassification, a problem that adversely affects workers' entitlements to minimum wage and overtime pay, fosters wage theft, gives certain employers an unfair advantage over compliant competitors, and has broader negative implications for the economy.

The final rule's guidance aligns with established judicial precedent, offering consistency for entities covered by the Fair Labor Standards Act. The "independent contractor" rule reintroduces the multifactor analysis employed by courts for decades. This analysis considers six key factors in determining a worker's status, including the opportunity for profit or loss, the financial investment in the work, the permanence of the work relationship, the level of control exerted by the employer, the essential nature of the work to the employer's business, and the worker's skill and initiative. This comprehensive approach aims to rectify misclassification issues, uphold worker rights, and establish a fair and consistent framework for classification under the Fair Labor Standards Act.

Additionally, the rule revokes the 2021 Independent Contractor Rule, which the department believes deviates from both the law and longstanding judicial precedent. The new rule, crafted after considering feedback from stakeholders gathered in forums during the summer of 2022 and the subsequent comment period in October 2022, is set to take effect on March 11, 2024.

You can read the Final Rule, 2021 IC Rule, here:

Federal Register :: Independent Contractor Status Under the Fair Labor Standards Act

Corporate Transparency Act: Most Corporate Entities Must File Beginning in 2024

In recent years, the regulatory landscape for businesses in the United States has undergone significant changes, particularly concerning the reporting of beneficial ownership information. The Corporate Transparency Act (CTA), enacted to counter money laundering, terrorism financing, and other illicit activities, introduces a mandatory Beneficial Ownership Information (BOI) reporting requirement.

I. Reporting Requirements and Applicability

The CTA, effective from January 1, 2024, mandates millions of small businesses to submit BOI reports to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN). The reporting obligations, detailed in regulations issued by FinCEN, encompass information on the creation, registration, and changes in beneficial ownership of corporations, limited liability companies (LLCs), and similar entities.

Entities falling within the scope of reporting, termed "domestic reporting companies" or "foreign reporting companies," are those created or registered with state authorities. Exemptions are granted to entities subject to substantial federal or state regulation, such as publicly traded companies, financial institutions, and tax-exempt entities. Additionally, a "large operating company," meeting specific criteria, qualifies for an exemption.

II. Beneficial Ownership Information: What to Report

Reporting entities, depending on their creation date, are obligated to provide comprehensive information. For entities created before January 1, 2024, the report covers the company's legal name, trade names, address, jurisdiction of formation, and taxpayer identification number. Beneficial owners' details, including full legal name, date of birth, address, unique identifying number, and relevant identification documents, must also be disclosed.

A beneficial owner, as defined by the CTA, is an individual exercising substantial control over the reporting company or owning/controlling at least 25% of its ownership interests. The "company applicant," responsible for filing the document creating the reporting company, is also a pivotal figure in the reporting process.

III. Reporting Timeline and Compliance Measures

The CTA establishes specific deadlines for filing BOI reports. Entities created before January 1, 2024, must file their initial reports by January 1, 2025. Those created between January 1, 2024, and January 1, 2025, have a 90-day window, while those formed after January 1, 2025, must file within 30 days of creation.

In cases of changes in reported information, reporting companies are obligated to submit updated reports within 30 calendar days. Failure to comply with reporting requirements carries severe penalties, emphasizing the importance of accurate and timely submissions.

IV. Filing Procedures and Access to Information

All BOI reports, updates, and corrections must be filed electronically with FinCEN, accessible through its website. The filing process includes obtaining a FinCEN Identifier, a unique number issued to individuals and reporting companies, streamlining the reporting of identifying information.

Access to BOI information is limited and regulated. FinCEN can disclose information to federal agencies involved in national security, intelligence, and law enforcement, state law enforcement agencies with court orders, financial institutions with the company's consent, government regulators, and certain foreign authorities via U.S. agencies.

Conclusion

The CTA, while introducing crucial measures for transparency and combating financial crimes, also raises several considerations for future regulatory developments. Clarity on regulatory terms and interpretations, such as "substantial control" and "ownership interests," remains crucial. Additionally, the Treasury's role in providing detailed regulations and guidance, especially regarding reporting nuances, exemptions, and potential amendments to the CTA, will significantly impact businesses' compliance efforts. Small business owners are urged to proactively assess their reporting obligations, determine eligibility for exemptions, and establish systems for gathering and updating required information.