As a business owner in Michigan, it is crucial to stay informed about legislative developments that could significantly impact your operations and workforce. One such development is Michigan House Bill No. 4399, which proposes substantial changes to the state’s laws governing non-compete agreements. This white paper aims to provide a comprehensive analysis of this bill and its potential implications for businesses in various sectors.
Please note this blog post should be used for learning and illustrative purposes. It is not a substitute for an attorney with expertise in this area. If you have questions about a specific legal issue, we always recommend that you consult an attorney to discuss the particulars of your case.
Understanding Michigan House Bill No. 4399
Introduced in April 2023, House Bill No. 4399 seeks to amend Section 4a of the Michigan Antitrust Reform Act, which currently allows employers to enter into non-compete agreements with their employees under certain conditions 1. These agreements typically restrict employees from working for competitors or starting their own competing businesses for a specified period after leaving their current employment.
This bill reflects a broader legislative trend toward increased employee mobility and protection, particularly for low-wage workers 2. It introduces several key provisions that would significantly alter the landscape of non-compete agreements in Michigan:
Restrictions on Non-Compete Agreements
House Bill No. 4399 introduces new limitations on non-compete agreements. While these agreements have traditionally been used to retain key employees and protect proprietary information, this bill aims to restrict their use to specific, high-level positions. The new regulations specify that non-competes should be reserved for roles that truly require protection due to access to sensitive information, unique client relationships, or proprietary knowledge 4.
This change means that businesses will need to reassess when and how they use non-competes. In industries where non-competes have been the norm, companies may have to think creatively to retain talent without overly restrictive agreements. For example, rather than applying non-competes across all positions, businesses might focus on non-disclosure agreements (NDAs) or non-solicitation agreements that can offer similar protections without the same level of restriction on employee mobility. It’s important to note that the bill does not affect the enforceability of non-solicitation agreements or agreements prohibiting the disclosure of confidential information or trade secrets 3.
Federal Non-Compete Ban and its Implications
In April 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete clauses nationwide. This rule aimed to promote competition by increasing worker mobility and fostering innovation. However, the rule was swiftly challenged in court, and a federal judge blocked its implementation in August 2024. The legal challenges are ongoing, creating uncertainty about the future of non-competes at the federal level.
This uncertainty has implications for Michigan businesses. If the FTC’s rule ultimately prevails, it could supersede Michigan’s House Bill No. 4399 and create a more restrictive environment for non-competes. Businesses should monitor these developments closely and prepare for various potential outcomes.
Prohibition of Non-Competes for Low-Wage Employees
House Bill No. 4399 explicitly prohibits non-compete agreements for “low-wage employees.” This category includes minors and employees earning less than 138% of the federal poverty line for a family of three, which translates to roughly $34,307 annually or $16 per hour for a full-time employee in 2023 5. This provision aims to protect low-wage workers from being unfairly restricted in their job prospects and earning potential.
This prohibition could potentially increase employee bargaining power by allowing them to seek better wages and working conditions without the fear of being legally restricted from working for competitors. However, it also presents challenges for businesses with a large proportion of low-wage workers. These businesses will need to find alternative ways to protect their interests, such as through robust training programs, employee engagement initiatives, and clear policies on confidentiality and intellectual property.
Notice and Disclosure Requirements
The bill introduces stricter requirements for employers who wish to use non-compete agreements with eligible employees. These requirements include:
- Providing written notice to job applicants that a non-compete agreement is required for the position.
- Disclosing the terms of the non-compete agreement in writing to the employee before hiring.
- Posting the law or a summary of its requirements in a conspicuous place in the worksite 6.
These requirements aim to increase transparency and ensure that employees are fully aware of the implications of signing a non-compete agreement. Businesses will need to update their employment practices and policies to comply with these requirements and avoid potential legal challenges.
Increased Penalties and Enforcement
House Bill No. 4399 strengthens the enforcement of non-compete regulations. It introduces stricter penalties for non-compliance, ranging from fines to potential legal action and the recovery of lost income for employees. Michigan regulators are expected to increase scrutiny of industries with a history of non-compliance 7. This means businesses will need to be more vigilant in maintaining records, meeting deadlines, and ensuring compliance with all aspects of the law.
Potential Impact on Businesses
The potential impact of House Bill No. 4399 on businesses will vary depending on several factors, including industry, workforce composition, and the nature of the business’s competitive landscape. Here’s a breakdown of the potential effects:
1. Restrictions on Protecting Trade Secrets and Confidential Information
Businesses often use non-compete agreements to protect their trade secrets, confidential information, and customer relationships. By restricting the use of these agreements, the bill could make it more challenging to prevent former employees from using this knowledge to benefit competitors. This is particularly relevant for businesses in industries with high levels of competition and rapid innovation.
2. Increased Employee Mobility and Turnover
The bill’s provisions could lead to increased employee mobility and turnover, particularly among low-wage workers. With fewer restrictions on their ability to seek employment elsewhere, employees may be more inclined to explore new opportunities. This could lead to higher recruitment and training costs for businesses and potentially increase the number of unemployment claims, putting a strain on the Michigan Unemployment Insurance Agency (UIA) 8.
However, increased employee mobility can also have positive effects. It can lead to a more dynamic and motivated workforce, with employees seeking out roles that best match their skills and interests. This can result in higher productivity and innovation as employees find better fits within the labor market.
3. Challenges in Enforcing Non-Compete Agreements
The bill’s stricter requirements for valid non-compete agreements could create challenges for businesses in enforcing these agreements. The need for written notice, disclosure, and posting may increase administrative burdens and potential legal risks if these requirements are not met meticulously.
4. Increased Administrative Costs
Compliance with the new regulations and the potential for increased legal challenges could lead to higher administrative costs for businesses. This includes costs associated with legal counsel, updating employment practices, and managing potential disputes related to non-compete agreements.
5. Impact on Innovation and Entrepreneurship
Non-compete agreements can have a negative impact on innovation and entrepreneurship by hindering new business formation and the diffusion of knowledge and skills. By restricting the use of non-competes, House Bill No. 4399 could potentially foster a more dynamic and innovative business environment in Michigan.
6. Potential for Local Labor Law Variations
The bill could potentially lead to a “patchwork” of local labor laws, with local governments enacting their own employment regulations 7. This could create inconsistencies and compliance challenges for businesses operating in multiple locations across Michigan.
7. Impact on Specific Industries
Certain industries may be disproportionately affected by House Bill No. 4399. Here’s a breakdown by sector
| Industry | Recommendations |
|---|---|
| Technology and IT | * Implement robust data security measures to protect proprietary software and algorithms. * Focus on employee retention strategies, such as offering competitive salaries, benefits, and opportunities for professional development. * Consider using non-solicitation agreements to prevent former employees from poaching clients or key personnel. |
| Manufacturing | * Strengthen internal controls and security protocols to safeguard trade secrets and manufacturing processes. * Invest in training and development programs to enhance employee skills and loyalty. * Explore alternative legal mechanisms, such as non-disclosure agreements and invention assignment agreements, to protect intellectual property. |
| Construction | * Develop comprehensive confidentiality and non-solicitation agreements to protect client relationships and project information. * Implement clear policies and procedures for handling sensitive documents and data. * Focus on building a strong company culture and fostering employee loyalty to reduce turnover. |
| Professional Services | * Develop strong client relationships based on trust and value to minimize the impact of employee departures. * Implement robust data security measures to protect confidential client information. * Consider offering equity or profit-sharing plans to incentivize employee retention. |
Conclusion
Michigan House Bill No. 4399 represents a significant shift in the state’s approach to non-compete agreements. The bill aims to promote employee mobility and fairness, particularly for low-wage workers, by restricting the use of non-competes and increasing transparency and enforcement.
Key provisions of the bill include:
- Limiting non-competes to specific, high-level positions.
- Prohibiting non-competes for low-wage employees.
- Introducing stricter notice and disclosure requirements.
- Increasing penalties for non-compliance.
While these changes may present challenges for businesses in protecting trade secrets and managing employee turnover, they also offer potential benefits, such as increased employee motivation and a more dynamic workforce. The bill could also have broader implications for Michigan’s economy, potentially fostering innovation, competition, and economic growth.
Businesses should proactively prepare for the potential impact of House Bill No. 4399 by:
- Reviewing and updating existing non-compete agreements.
- Revising employment practices and policies to ensure compliance.
- Exploring alternative strategies for protecting trade secrets and retaining talent.
- Consulting with legal counsel to navigate the complexities of the new regulations.
By understanding the bill’s provisions and taking appropriate measures, businesses can adapt to the changing legal landscape and position themselves for continued success in the marketplace.
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References
- Stoel Rives LLP. “New Federal Rule Banning Noncompetes May Impact Construction Industry,” April 25, 2024. https://www.stoel.com/insights/publications/new-federal-rule-banning-noncompetes-may-impact-construction-industry
- Construction Financial Management Association. “Non-Compete Rulings: Recent Developments in Non-Compete Enforcement,” accessed February 8, 2025. https://cfma.org/articles/non-compete-rulings-recent-developments-in-non-compete-enforcement
- Equipment World. “What the FTC Noncompete Ban Means for Construction Contractors,” June 6, 2024. https://www.equipmentworld.com/business/article/15676412/what-the-ftc-noncompete-ban-means-for-construction-contractors
- Groundbreak Carolinas. “FTC Non-Compete Ban: What Employers Need to Know,” May 22, 2024. https://groundbreakcarolinas.com/ftc-non-compete-ban-what-employers-need-to-know/
- U.S. Government Accountability Office. “Noncompete Agreements: Use Is Widespread to Protect Business’ Stated Interests, Restricts Job Mobility, and May Affect Wages,”1 January 2023. https://www.gao.gov/assets/gao-23-103785.pdf
- Federal Trade Commission. “FTC Announces Rule Banning Noncompetes,” April 23, 2024. https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
- CPA Journal. “Tread Carefully When Using Noncompete Agreements,” accessed February 8, 2025. https://www.cpai.com/Education-Resources/My-Firm/Confidentiality/Tread-Carefully-When-Using-Noncompete-Agreements
- U.S. Department of the Treasury. “Non-Compete Contracts: Economic Effects and Policy Implications,” March 2016. https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf
- Michigan Legislature Website: https://www.legislature.mi.gov/
- Michigan Votes: https://www.michiganvotes.org/
- Federal Trade Commission: https://www.ftc.gov/
- U.S. Government Accountability Office: https://www.gao.gov/
- Small Business Association of Michigan: https://www.sbam.org/
- Michigan Chamber of Commerce: https://www.michamber.com/