As we approach the final quarter of 2024, it’s crucial for Michigan business owners to understand the current status of two important issues: the Federal Trade Commission’s (FTC) ban on non-compete Agreements and the Corporate Transparency Act (CTA) compliance.
The FTC’s rule and the CTA law have both come under legal attack during the court of 2024. In the case of the FTC ban on non-compete agreements, a federal court has, as discussed below, invalidated the FTC’s actions—a decision that has nationwide effect. However, while an Alabama federal court declared the CTA unconstitutional earlier this year, the scope of the court’s decision is limited to the parties in that case. Accordingly, most Michigan businesses still must comply with the CTA by January 1, 2025.
The Shifting Landscape of Non-Compete Agreements
On August 20, 2024, the United States District Court for the Northern District of Texas delivered a blow to the FTC non-compete ban in the case of Ryan LLC et al v. Federal Trade Commission. This decision effectively invalidated the FTC rule that would have prohibited most non-compete agreements, which was set to take effect on September 4, 2024.
The court found that the FTC lacked the necessary rulemaking authority under the Federal Trade Commission Act to implement such a sweeping ban. Additionally, the court deemed the FTC’s actions and findings as arbitrary and capricious
What This Means for Michigan Businesses: For now, the existing legal framework governing non-compete agreements remains intact. Employers can continue to use non-compete agreements where permitted by applicable laws. However, it’s important to note that this ruling may face appeals, and the legal landscape could shift again.
The Broader Trend: Despite this setback for the FTC, there’s a clear nationwide trend towards limiting or outright banning non-compete agreements. Many states have already enacted laws restricting their use, particularly for lower-wage workers. This trend suggests that relying heavily on non-compete agreements may become increasingly challenging in the future.
Alternative Approaches: In light of these developments, Michigan businesses may want to consider adjusting their approach to protecting their interests. One effective alternative is the use of non-solicitation agreements, as we recently wrote about. These agreements, which prevent former employees from soliciting a company’s clients or staff for a specified period, offer a more targeted approach to protecting business interests while generally facing less scrutiny from courts and regulators.
Non-solicitation agreements allow former employees to continue working in their field of expertise, even for competitors, but draw a clear line when it comes to actively pursuing their former employer’s clients or staff. This balance often makes non-solicitation agreements more palatable to employees and potentially more enforceable in court.
As you consider your business’ approach to protecting its competitive advantage through the use of various agreements, such as non-solicitation agreements, it’s important to consult with experienced legal counsel who can advise you on their relative benefits and risks. If you have questions or require assistance, please contact Zana Tomich.
Corporate Transparency Act Compliance Deadline Approaching
Michigan businesses face an important upcoming deadline for complying with the federal Corporate Transparency Act. Despite ongoing legal challenges, as of now, Michigan businesses are required to comply with the CTA by January 1, 2025.
Here are some of the key compliance points of the CTA:
- Scope: The CTA applies to most small and midsize businesses, including one-person operations. Many federal laws exempt smaller businesses, but the CTA is different – most exemptions apply to larger corporations.
- Reporting Requirements: Businesses must report information about the company, its beneficial owners (those who exercise substantial control or own 25% or more), and company applicants (those who formed or registered the company).
- Deadline: Companies created or registered before January 1, 2024, must file their initial report by January 1, 2025. Entities formed or registered in 2024 have 90 days from formation or registration to file.
- Penalties for Non-Compliance: Failure to comply can result in severe penalties, including civil fines of $500 per day and potential criminal penalties including imprisonment and fines up to $10,000 per violation.
The Importance of Compliance: Given the broad application of the CTA and the significant penalties for non-compliance, it’s crucial for Michigan business owners to take this requirement seriously. While there’s still time to comply, the complexity of the reporting requirements means it’s essential that businesses start preparing now rather than waiting until the last minute.
Contact us with questions or for assistance.
