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As part of NJBIZ’s latest virtual discussion, attorneys from three of New Jersey’s top law firms delved into the Federal Trade Commission’s controversial vote to prohibit the use of noncompete agreements for almost all U.S. workers.

Moderated by NJBIZ Editor Jeff Kanige, the May 15 panel featured:

• Julie Levinson Werner, partner & vice chair of employment, Lowenstein Sandler LLP
• Patrick McGovern, partner & labor & employment group chair, Genova Burns LLC
• Jack Losinger, member, Saiber LLC

During the hour-and-a-half roundtable discussion, panelists provided an overview of the new rule, who it applies to, what companies should do to prepare and how it is being challenged in the courts. The measure was first proposed in January 2023 and will take effect two days after Labor Day – Sept. 4.

If court rulings do not overturn the ban, it will create issues for businesses – especially as it relates to insurance, management and operations, panelists said.

McGovern described it as “a cosmic change” that will require employers to “devise and implement other mechanisms in order to retain their key employees.”

Defining the term

Losinger said, “In terms of what this rule applies to, I think that we should specify what a noncompete is … the way that it’s defined under the rule is any post-employment restriction that either prohibits or penalizes or functions to prevent an employee from working somewhere else or from operating a business. So, we have to look at each of those potential categories that would fit into what constitutes a noncompete under the rule.

“The first is prohibits,” he explained. “So that one’s pretty obvious if there’s a terms and conditions that expressly prohibit a worker from accepting or seeking other work after their employment ends. For example, if you’re an accounting firm and you say that a certain accountant can’t go work for another accounting firm in the state, that’s a noncompete that prohibits the worker from working somewhere else, that would be unenforceable under the rule.”

Penalties

“The second category are those that penalize a worker for working somewhere else. Those would include agreements that a worker has to pay liquidated damages if he goes to work somewhere else,” he said. “Sometimes we’ll see agreements where it says, ‘if you work for a competitor, it’ll be hard for us to calculate our damages, so you have to pay us $50,000.’ That would be an unenforceable noncompete under the rule.

Replay: FTC’s Noncompete Ban – What Businesses Need to Know

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“Similarly, if there’s an agreement that you would forfeit some compensation like stock options or something like that, that would be a penalty,” Losinger continued. “That would be an unenforceable noncompete under the rule or a training repayment agreement or a trap whereby the employer says, if you go work somewhere else, you have to pay us back the money that we put up to train you. That would be a penalty; that would be an unenforceable noncompete under the rule.”

Levinson Werner defined that as a “very, very narrow limited group.”

Exceptions

The change would carve out exceptions for existing agreements that companies have with their senior executives on the grounds that these contracts are more likely to have been negotiated.

“It excludes people who fall under a very heightened definition of what a senior executive is, which is someone who has a salary threshold or total annual compensation threshold of $151,000 – which includes, cash and prizes, essentially salary, bonus and equity … generally speaking it’s an annual total compensation amount,” she said. “But, that’s not the end of the story because the person also has to fall under the definition essentially of being a policymaker or in a policymaking position … which is defined under the rule as the business entity’s president, chief executive officer, or the equivalent or any other officer of a business entity who has policymaking authority.”

It does not, however, include division heads. That’s because they are not considered a position with ultimate decision-making power, said Levinson Werner. She added that it’s a point that concerns her, especially given the many giant corporations that call New Jersey home.

Challengers

While the changes would be significant for businesses, legal challenges will likely delay the ban from taking effect – or derail it entirely, panelists said.

McGovern said he’s finding it “very difficult to provide any guidance to clients that this is going to take effect on Sept. 4.”

“Given the fact that we’re going to have appeals and it will probably be stayed pending the appeal,” he said. “Then, we are going to have an election on Nov. 5 and people are going to be waiting to see who the results of the election and what the new administration, if any, would do to this particular rule, as well.”

Losinger said, “It seems that those arguments are fairly strong that the FTC has overreached somewhat here and that what the FTC has done highlighted some overall trends that should be looked at by state legislatures or by Congress … I think it’ll be interesting to see what the court does with it and whether or not this judge looks at all of the reasoning behind the FTC’s rule or simply looks at the constitutional issues.”

Time for some self-reflection

While the legal challenges play out, panelists encouraged companies to take stock.

Losinger said, “Now is the time as an employer and as a business to take a look at what your goals are, what you’re trying to protect and making sure that you have in place what you need.”

McGovern added, “I would just say to be aware of what agreements you have in place and do an audit of which employees you have noncompetes or non-solicits with … If you are one of these companies that has a broad policy of everybody signs a noncompete on their first day of work, regardless of what happens with the rule, you have to look at that and reconsider that and make sure that your agreements are logical and connected to each employee.”

Levinson Werner reiterated the importance of “identifying what agreements already are in effect, who the key decision makers are, who is of concern, who could fall under the definition of a senior executive and making sure those are the ones that will survive post-Sept. 4.”

Look for expanded coverage of this panel discussion in the May 20, 2024, issue of NJBIZ.