In April, two substantial developments in employment law occurred that have significant implications for employers in Texas.
FTC Issues Rule Banning Noncompetition Clauses
On April 23, 2024, the Federal Trade Commission issued a final rule that will ban noncompetition clauses in employment contracts, subject to just a few exceptions. The rule will go into effect 120 days after its publication in the Federal Register.
Lawsuits have already been filed challenging the rule, meaning that there is a distinct possibility that the rule will be enjoined, at least on a temporary basis.
However, if the rule is not enjoined and goes into effect a few months from now, the rule will require the following:
Employers will no longer be able to enter into noncompete agreements with employees of any level, including executives.
Existing noncompete clauses for many employees will be rendered unenforceable.
Any existing “executive” noncompetes will be grandfathered in. Executives are people who make $151,164 annually and who are in policy-making positions.
Employers must notify employees that existing noncompetes are invalid and unenforceable.
State noncompetition laws will largely be preempted.
The rule does have a few carve-outs. For example, any causes of action related to noncompetes that accrued before the effective date will not be affected. In addition, businesses engaging in mergers and acquisitions may still have valid noncompetition clauses. Further, employers may still require employees to protect trade secrets and confidential information, and existing NDAs will not be affected (except to the extent that they include noncompete provisions).
If it does go into effect, the FTC’s new rule has significant implications for employers. Businesses will want to ensure that, going forward, their NDAs comprehensively protect their confidential information and trade secrets. Strong NDAs will help cover the gap left by the FTC’s ban on noncompetes.
Supreme Court Issues Opinion Changing Threshold of Harm in Title VII Discrimination Cases
On April 17, 2024, the Supreme Court of the United States issued an opinion in Muldrow v. City of St. Louis, Missouri that attempts to clarify the amount of harm a plaintiff must prove to prevail in a Title VII discrimination lawsuit.
Muldrow addressed a circuit split on whether plaintiffs should be required to prove a heightened threshold of harm in discrimination cases. Some circuits used a heightened harm standard, requiring plaintiffs to show that alleged discrimination caused a “material” or “significant” adverse employment action. In Muldrow, the Supreme Court resolved this circuit spit, holding that plaintiffs asserting Title VII discrimination cases do not need to show a heightened level of injury, but must only show “some harm” occurred as a result of the employer’s allegedly discriminatory act.
In his concurrence to Muldrow, Justice Alito opined that the Court’s decision will not fundamentally alter lower courts’ practice, and they will still assess discrimination in generally the same way they did prior to Muldrow. Essentially, Alito considers Muldrow to have created a distinction in terms (i.e., “materially significant harm” versus “some harm”) without a meaningful difference in application. Only time (and future lower court decisions) will tell as to the scope of the Muldrow standard’s impact.
In the wake of Muldrow, employers will want to be careful to document their reasoning for changes to employee terms and conditions of employment. Hiring and firing and compensation decisions are not the only times to keep this in mind; changes to employees’ work responsibilities, locations, schedules, perks, etc. may also be covered as adverse employment actions. Employers should assess and document the legitimate business reason(s) for such changes and whether any potential bias may be involved as part of the decision. Keeping clear records demonstrating nondiscriminatory and legitimate business reasons for changes to an employee's job conditions are best practices to follow in these scenarios.