The Federal Trade Commission, or FTC, issued a final rule banning noncompete agreements throughout the nation on April 23.

In 2020, Washington state enacted its own prohibitions on noncompete agreements (with a pending update set to enact later this year).

How do the two rules (from Washington and the FTC) line up, and what are the applicable exemptions to the general rule that bans noncompete agreements?

Washington rule

Today in Washington state, noncompete covenants (contained in RCW 49.62) are not enforceable unless: the employee makes over about $120,000 a year (for 2024); and the terms of the noncompete are in writing and disclosed prior to employee’s acceptance of employment, or the employer provides independent compensation if entered into during the term of employment.  

Additionally, the employer must agree to compensate the employee his or her base salary if the employee is laid off for the term of the noncompete (with adjustment based on employee’s subsequent employment compensation).

Further, noncompete agreements over 18 months in duration post-employment are presumptively unreasonable and unenforceable. The Washington rule specifically excludes from its coverage any nonsolicitation or nondisclosure agreements.

FTC rule

The FTC rule (contained in 16 CFR Part 910) appears to provide even broader protections for employees than does the Washington law. It makes all existing noncompete agreements unenforceable with an exception for noncompete agreements for senior executives.

A senior executive is an employee that earns more than $151,164 annually (a higher threshold than Washington’s law) and who is in a policymaking position. A “policymaking position” is reserved for those who “exercise the highest levels of authority in an organization…”

Further, a policymaking position means a “business or entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policymaking authority, or any other natural person who has policymaking authority for the business entity similar to an officer with policymaking authority.” 

Importantly, the FTC estimates that only about 0.75% of workers qualify for this designation. Title alone is insufficient to place an employee in a policymaking position. So, not only does the FTC rule require a higher earning level to enforce a noncompete, it also requires that the employee hold a policymaking position that the FTC has determined will not apply to over 99% of workers.

But, the FTC rule goes even further in its definition of a noncompete. It includes in the definition of “noncompete” any term or condition of employment that prohibits or penalizes a worker from competing. But, more broadly, it includes any term or condition of employment that “functions to prevent” a worker from competing.  It’s that last clause that might pull in other types of agreements that are not technically classified as a noncompete agreement from the document. For example, although a nonsolicitation agreement may not prohibit or penalize competition, it might be included in the definition of a noncompete if it “functions to prevent” competition.

The FTC has provided: “the term ‘functions to prevent’ clarifies that, if an employer adopts a term or condition that is so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a noncompete clause …” and would be prohibited by the rule.

Employers also should note that the new FTC rule requires affirmative action by the employer to provide notice to employees that the employee’s “noncompete clause will not be, and cannot legally be, enforced against the worker.”

Taken together

Between Washington’s current law, the updates scheduled for later this year, and the new FTC rule, there is a lot of nuance to parse when putting together any restrictive employment clauses. Nondisclosure agreements and nonsolicitation agreements appear to still be effective but for the fear that the restrictions might meet the “function to prevent” clause under the FTC’s definition.

More than ever before, it is vital for business owners to consult with their attorneys to put in place the agreements necessary to protect the business, but also to look to other employee benefits or compensation structures to further incentivize employees to remain loyal to the company.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.