Ryan E. Mick

The Federal Trade Commission (“FTC”) just approved a rule that would largely prohibit making or enforcing employee noncompete agreements. The U.S. Chamber of Commerce and others have already sued to block the new rule. What should businesses and employees know? Timing. The earliest possible effective date for the rule is four months from now—120 days after publication in the Federal Register. The date will be even later (if ever) if a court delays or blocks the rule’s implementation. If the rule goes into effect as written, however, it will prohibit making new agreements and enforcing most existing agreements (unless the agreement was breached before the effective date). Prohibition. The rule is broad. It prohibits every “term or condition of employment that prohibits a worker from, or penalizes a worker for, or functions to prevent a worker from… seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition,” or “operating a business in the United States after the conclusion of the employment that includes the term or condition.”   Limited Exemption for Noncompetes with Senior Executives. The rule prohibits new noncompete agreements across the board, but permits enforcement of noncompete agreements with certain “senior executives” that exist as of the effective date. “Senior executive” means that the employee must earn at least $151,164 in annualized compensation (including salary, commissions, and nondiscretionary bonuses, but excluding payments for medical insurance, payments for life insurance, contributions to retirement plans. and the cost of other similar fringe benefits). The “senior executive” must also hold a “policy-making position,” such as president or CEO. An officer of a subsidiary, however, will probably not be considered a senior executive.  The meaning of “policy-making position” is not at all clear. Notice Requirement. The rule also requires employers to provide workers who are subject to covered noncompete clauses “with clear and conspicuous notice … that the worker’s non-compete clause is no longer in effect and will not be, and cannot legally be, enforced against the worker.”  Sale-of-Business Exception. The rule exempts noncompete clauses that are “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” Whether the exception applies to executives that have rights to shares in a corporation as part of their equity awards will likely be a topic of future litigation.   State Laws. The FTC rule sets a floor but not a ceiling for state law. A state can continue to prohibit noncompetes altogether, or it can set a lower compensation level than the $151,164 at which the FTC rule would render existing noncompetes with “senior executives” unenforceable. Enforcement. The rule does not directly create any cause of action for employees. It is possible that the FTC will bring enforcement actions. It is also possible that state attorneys general will enforce their states “little FTC Acts” and use the FTC’s rule as an indicator of what constitutes “unfair methods of competition” under state law. Finally, an employee might argue that a state should update its own common law principles in light of the rule or (where state law permits it) bring a private action under the state’s statutory law. Legal Challenges. The U.S. Chamber of Commerce, joined by several other business groups, has filed a lawsuit in Texas federal court seeking to prevent implementation of the rule. Private employers have also started lawsuits. The Chamber claims that the FTC lacks statutory authority for this rulemaking, that not all noncompetes can be considered anticompetitive, that the rule is impermissibly retroactive (applying to agreements that were already negotiated), and that the rule is arbitrary and capricious.   Actions for Employers Use the Time. This rule has been in the works for more than a year, so many employers have already prepared for this day. But if your company has not developed a contingency plan, use the next several months wisely. As employers in states that have already banned noncompetes know, there are many ways to protect legitimate business interests, even if noncompetes are prohibited. Review Key Non-Disclosure, Non-Solicitation, and Confidentiality Provisions and Agreements. Employers should evaluate how to protect their highly sensitive information through means other than a noncompete, such as strengthening confidentiality and nondisclosure provisions. Employers should consider limiting the number of employees who have access to highly sensitive information—and ensure that those who do have access also have strong confidentiality agreements and receive training on their obligations to maintain confidentiality during and after employment. Employers should carefully review provisions prohibiting the solicitation of customers and clients to determine whether they come within the rule’s prohibition. Employers should also put measures in place to prohibit new hires from breaching confidentiality provisions entered into with previous employers.  Identify “Senior Executives.” Employers should do their best to identify which of their employees might qualify as “senior executives.” That includes ensuring they meet the compensation requirement, and developing the employer’s rationale for why those employees have “policy-making” authority.    Review Template Noncompete Agreements. Employers should also revisit template agreements for lower-level employees to identify provisions that might violate the rule and consider alternative provisions to protect the company’s legitimate business interests.   Be Mindful of State Laws. Even if a court prohibits implementation of the FTC’s rule, remember that relevant state laws will remain in effect. California, Minnesota, North Dakota, and Oklahoma have banned most noncompete agreements entirely. Several states prohibit noncompete agreements with employees whose compensation is below a statutory amount. These states include Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and Washington D.C. Prepare for Notifications. Employers should develop plans for complying with the rule’s notice provisions—and make sure that they comply with any applicable notice requirements under state law. For example, California recently implemented a notice requirement with a deadline of February 14, 2024 for employers to provide the notice. Consider Alternative Retention Strategies. The rule prohibits the stick, but not the carrot. Employers should consider whether alternative retention strategies will now become more necessary if the rule goes into effect. For example, an employer might offer hiring bonuses in their compensation packages, payable after a satisfactory employment period (one year, for example) but advanced to the employee upon hire. Employees who leave before the period can then be on the hook to repay the bonus if they leave early, which protects a company’s investment in an employee by incentivizing a certain minimum tenure.   Think About the Opportunities. If the rule goes into effect, your noncompete agreements will become largely unenforceable—but so will those of your competitors. Consider whether the rule might create hiring opportunities. Comply with Antitrust Laws. The rule deals only with agreements between employers and their workers.  Making those agreements unenforceable might increase the incentive to work out informal agreements with competing employers not to hire each other’s workers. Don’t succumb to that temptation!  In 2016 the FTC and the U.S. Department of Justice (“DOJ”) announced their position that “no poaching” agreements between employers were not only per se illegal, but also criminal violations. It took DOJ several years to bring a criminal enforcement action, and it has yet to win a conviction from judge or jury, but that is cold comfort to anyone who has to endure a criminal prosecution. Moreover, civil private class-action litigation against no-poaching agreements continues apace.

The Minnesota Legislature recently concluded its 2023 session with the passage of a comprehensive paid family medical leave bill Mn Chapter 59  and an omnibus labor bill Mn Chapter 53  that will impose significant new obligations on Minnesota employers. Governor Walz promptly signed all bills. Dorsey’s prior e-update focused on Minnesota’s impending ban on new non-competition agreements between employers and employees. The legislature also passed a statewide sick and safe leave requirement, a paid family and medical leave program that includes new protected leave rights for Minnesota employees, and expanded protections for pregnant and nursing employees, among other new provisions targeting certain industries (such as meat packers and the construction industry). The legislature also passed a recreational marijuana bill, which will further complicate drug testing and discipline for Minnesota employers. Expanded Pregnancy and Nursing Protections Effective July 1, 2023 (included in Mn Chapter 53) Under existing law, employers that employ over 21 employees must provide reasonable break times each day to an employee who needs to express breast milk. Effective July 1, 2023, all employers with more than one employee must comply with the statute. In addition, an employer’s right to require nursing breaks to run concurrent with scheduled break times has been curtailed, and the former exception for breaks that would unduly disrupt the employer’s operations has been revoked. An employee’s right to breaks to express breast milk is no longer limited to the 12 month period following birth of a child. The new law also expands the statutory list of potential reasonable accommodations for pregnant employees to expressly include temporary leave of absence, modification of work schedule or job assignments, and more frequent or longer breaks, in addition to transfer to a less strenuous or hazardous position, seating accommodations, or limits to heavy lifting. Employers must give notice of these provisions upon an employee’s request and must provide information regarding employee rights and remedies in any employee handbook. The Minnesota Department of Labor and Industry is required to provide uniform notice language. All Minnesota Employers Must Provide Paid Sick and Safe Leave Effective January 1, 2024 (included in Mn Chapter 53) While employers in Minneapolis and St. Paul (and some other localities) have been subject to paid sick and safe leave requirements for some time, effective January 1, 2024, all Minnesota employers will be required to provide that benefit. Under the new law, full-time, part-time and temporary employees are entitled to earned sick and safe leave, provided the employee works at least 80 hours in a year for that employer in Minnesota.  Employees will be entitled to accrue at least one hour of earned sick and safe time for every 30 hours worked, up to a legally required 48 hours of earned sick and safe time per year. Employees must be permitted to carry over unused sick and safe time year to year, up to 80 total hours. There is a limited front-loading option as an alternative to accrual based on hours worked.  Employers must keep accurate records of accrued sick and safe time for each employee. Accrual commences on the first day of employment and earned sick and safe time may be used as it accrues. Employees must be permitted to use earned sick and safe time broadly, including for the employee’s own physical or mental illness or injury; to care for a family member; absences due to domestic abuse, sexual assault or stalking of the employee or a family member; seeking legal advice or participating in any criminal or civil legal proceeding related to domestic abuse, sexual assault or stalking; the closure of employee’s place of business due to weather or public emergency; absences due to providing care for family members whose school or place of business has been closed due to weather or public emergency; or an inability to work caused by circumstances analogous to the COVID pandemic. For purposes of the law, “family member” is defined broadly to include an employee’s child (including foster child, adult child, or child to whom the employee stands in loco parentis), spouse or domestic partner, siblings (including foster or stepsiblings), parents (including foster parents, stepparents, or any person who stood in loco parentis to the employee), grandparents or grandchildren, aunts, uncles, nieces, nephews, “any other individual related by blood or whose close association with the employee is the equivalent of a family relationship,” and “up to one individual annually designated by the employee.” An employer may require reasonable notice (up to 7 days) of the need to use earned sick and safe leave time, but only pursuant to a written policy containing reasonable procedures for employees to provide such notice. Notably, if the need for leave is unforeseeable, employers may not require more notice than is “practicable” for the employee. Employers may not retaliate against an employee for exercising rights under the statute and must maintain the employee’s insurance coverage during any period of sick and safe leave. Employees must be returned to a position at the same rate of pay, and with all pre-leave benefits and seniority, upon conclusion of sick and safe leave. Employers must give notice of sick and safe leave rights to current and new employees, either by a posting in the workplace or by providing notice directly to employees in hard-copy or electronic form. The Minnesota Department of Labor and Industry is required to provide a uniform employee notice form. The law also imposes confidentiality obligations on employers who learn private information associated with an employee’s need for protected leave. Employers need not pay out accrued but unused sick and safe time upon termination, but must reinstate an employee’s sick and safe time bank upon rehire within 180 days. Successor employers, including business purchasers, must honor employees’ sick and safe time banks. The law also provides for either the Commissioner of Labor and Industry or the individual employee to bring a claim within 3 years of the alleged violation. An employer’s existing PTO practices likely will suffice to provide the required sick and safe leave benefit, provided the policy or practice satisfies the requirements of the new law (i.e., number of hours, carry over, notice limits, use of leave).Significantly, the new sick and safe leave entitlement is in addition to the paid family medical leave benefit described below. All Minnesota Employers Must Provide Protected Family and Medical Leave Effective January 1, 20261 The vast majority of Minnesota employees (including those employees who may work outside of Minnesota for the majority of their time but whose work is “controlled and directed” from Minnesota) will be entitled to paid family and medical leave (“PFML”) benefits under a state-run insurance program administered by the Department of Economic Development. The program will be funded by a new payroll tax currently set at 0.7%. In the event that an employer chooses to participate in the state-run PFML program, the law allows employers to deduct 50% percent of the payroll tax from their employee’s wages. Employers may be able to substitute a private plan for the state-run benefit, but all employers will be required to provide protected leave for employees concurrent with their entitlement to benefits. The Department of Commerce is granted the authority to certify any substitutions of private plans. Effective January 1, 2026, Minnesota employees will be entitled to protected leave for up to 12 weeks for an employee’s own serious health condition and 12 weeks for bonding, safety leave, family care or qualifying exigency leave (military service and related leave), up to a total of 20 weeks of protected leave in any benefit year. Employees are protected by the statute’s reinstatement rights ninety days from the date of hire. Employees may use PFML leave on an intermittent basis, for up to 480 hours in any 12-month period. There is no undue hardship exception, but an employee must provide a schedule of days off as soon as practicable and must make a reasonable effort to schedule intermittent leave to avoid disruption to an employer’s operations. (However, an employer’s ability to enforce this requirement is virtually nonexistent.) In determining an employee’s eligibility for benefits: “Serious health condition” for purposes of an employee’s self-care or care of a family member is similar to the FMLA; “Safety leave” means leave from work because of domestic abuse, sexual assault or stalking of an employee or the employee’s family member, including seeking medical attention or victim services, seeking relocation, or participating in legal proceedings. “Family members” are defined broadly to include an employee’s spouse or domestic partner, child (including foster child, child to whom the employee stands in loco parentis or “de facto parent”), siblings, parents or a spouse’s parents (including foster parents, stepparents, or any person who stood in loco parentis), grandparents or a spouse’s grandparents, grandchildren, son-in-law or daughter-in-law, or any individual “who has a relationship with the applicant that creates an expectation and reliance that the applicant care for the individual, whether or not the applicant and the individual reside together.” As a general rule, eligibility for leave requires a seven-day qualifying event. An employer may require reasonable notice, including at least 30 days’ notice for foreseeable leave, or as much notice as practicable if 30 days is not possible.  Employees are entitled to protected leave for any day for which they have been deemed eligible for PFML benefits, as well as any day for which the employee cannot work and has applied for benefits in “good faith.” Good faith is defined as “anything that is not knowingly false or in reckless disregard of the truth.” (It is unclear what rights an employee may have if they fail to provide reasonable notice but have applied for benefits other than based on a knowing falsehood.) Thus, employers likely will be required to determine an employee’s eligibility for protected leave in the absence of a benefits eligibility determination from the state, given the potential for significant lags between an employee’s need for leave and their application for benefits (or the determination thereof). It also is unclear what obligations an employer will have to provide protected leave in the event of an appeal from an initial benefits determination. Employers may not interfere with an employee’s use of leave or application for benefits or retaliate against an employee for exercising rights under the statute. Employers are subject to rigorous requirements to return the employee to the same or virtually identical position at the conclusion of protected leave, subject to limited exceptions if the employee’s employment would have terminated regardless of leave status. Employers must maintain the employee’s insurance coverage during any period of protected PFML leave. Although employers may require the employee to pay their share of premiums, an employer’s obligations if an employee fails to do so are unclear. An employer may require that state-mandated PFML run concurrently with federal FMLA leave, to the extent possible, but employers should note that if an employee’s PFML leave is not FMLA-qualifying, the employee would have additional FMLA rights in the event of a later FMLA-qualifying leave. Further, unlike the federal FMLA benefit, there is no threshold minimum number of employees before an employer is covered. Employees can chose to use other available benefits (PTO or vacation) in lieu of PFML benefits, but an employer may not require an employee to do so. An employee’s PFML leave benefits are in addition to sick and safe leave benefits available under state law or local ordinances. Thus the actual duration of protected leave may be substantially more than 12/20 weeks. Employers must post notice of benefits under the new statute in the workplace and must provide written notice (in the employee’s primary language) of benefit and leave eligibility, as well as premium deductions to be made by the employer. Employers have new wage detail reporting obligations and are required to maintain statutorily required employee earnings statements, including tax deductions for PFML benefits premiums, for at least 3 years. For employment practitioners, release of claims under the PFML statute are subject to the MHRA’s 15-day rescission period. Minnesota employers face fundamental changes as a result of the new laws passed in the 2023 Legislative Session. Employers can implement necessary changes thoughtfully, so some of the more onerous obligations have extended effective dates and will requires administrative rulemaking to implement. Executives and HR professionals should thoroughly analyze these new significant requirements and consult with their legal advisors to ensure they take the steps necessary to come into compliance. Dorsey’s Labor and Employment team will discuss these new laws (and others) at our annual symposium in August. 1This is a complex bill with various effective dates applicable to the Department of Economic Development and other government agencies but the Employer’s obligation to provide leave and to commence withholding is January 1, 2026.