For many Michigan employers, the better question is no longer whether noncompetes are controversial. It is whether the state is on the verge of replacing a reasonableness-based system with a near-total prohibition for ordinary work relationships. That is why House Bill 4040 has drawn such close attention. Michigan is not currently a blanket-ban state. Under existing law, employers may still use post-employment noncompetes when those covenants protect a reasonable competitive business interest and are reasonable in duration, geography, and scope of activity, and Michigan courts may narrow an overbroad agreement and enforce it as limited. ¹ But HB 4040 is written from a very different premise. Instead of refining the current reasonableness test, the bill would largely prohibit noncompetes with covered workers and then preserve only a narrow set of exceptions. ²
That distinction matters because the headline question, “Will Michigan effectively ban noncompetes?” can be answered accurately only if the proposal is separated from the law that exists today. As of April 21, 2026, HB 4040 has not become law. The Michigan Legislature’s public bill history shows the bill was introduced on January 30, 2025, read a first time, and referred to the House Committee on Economic Competitiveness, and the committee records still list HB 4040 in that committee. ³ So the immediate answer for employers is that Michigan has not yet banned noncompetes. The more important answer, however, is that the introduced text would dramatically change the terrain if enacted in anything close to its current form, and because the bill is drafted to apply to agreements entered into before, on, or after the effective date, it is not merely a question about future offer letters. ² ³
To understand the size of the proposed change, it helps to start with the current baseline. Michigan’s existing statute, MCL 445.774a, has long functioned as the state’s statutory home for employee noncompetes. The rule it embodies is not a flat prohibition. Rather, it asks whether the covenant protects a legitimate competitive interest and whether the restraint is reasonable in duration, geographic scope, and line of business. If a restriction goes too far, the statute allows a court to trim it and enforce it as modified. ¹ That framework gives employers real room to use noncompetes, especially when they can tie the restraint to confidential information, customer goodwill, or an unfair competitive advantage that goes beyond an employee’s general skill and experience. In practical terms, Michigan employers have historically operated in a world where careful drafting could salvage a covenant, and overbreadth was often a matter of litigation risk, not automatic statutory invalidity. ¹
HB 4040 would replace that posture with something much more restrictive. The introduced text defines a “noncompete agreement” broadly as an agreement between a business and a worker that prohibits the worker from, penalizes the worker for, or functions to prevent the worker from seeking or accepting work with a different business or operating a business after the worker’s work ends. ² That “prohibits, penalizes, or functions to prevent” language is critical. It signals that Michigan lawmakers are not just targeting the classic sentence that says, “You may not work for a competitor for one year.” They are also targeting clauses that operate as a practical restraint even when they are dressed up with softer labels. In other words, the bill is drafted to look at function, not merely form. That is why the legislation matters not only to lawyers who draft noncompete paragraphs, but also to the people who manage bonus plans, contractor forms, side letters, restrictive covenant addenda, and separation documents. ²
The breadth of the bill becomes even clearer when one sees who counts as a covered “worker.” The introduced text says a worker means an employee, independent contractor, extern, intern, volunteer, or apprentice. ² That is a much broader category than the employee-only framework many organizations still assume when they audit their restrictive covenants. For employers, the practical significance is substantial. A business that believes it can solve the problem by moving a covenant from an employment agreement into an independent contractor agreement, a consulting agreement, or an internship document may discover that the bill is specifically written to collapse those distinctions for noncompete purposes. If the Legislature ultimately adopts that approach, template governance becomes much harder to silo. Restrictive covenant risk would no longer live only inside HR paperwork. It would spread across commercial relationships and worker-facing forms throughout the enterprise. ²
So would HB 4040 “effectively ban” noncompetes? For ordinary post-employment restraints, the honest answer is yes, very nearly so. The bill does preserve exceptions, but they are narrow enough that most traditional employee noncompetes would not survive. The most important exception concerns sale-of-business situations. The introduced text says the general prohibition does not apply if the worker is an owner selling the business or the worker’s full or partial ownership interest, or if the worker is responsible for the sale of all or substantially all of the business’s operating assets, and even then only if the restraint protects only the business’s reasonable competitive interests, has a reasonable duration, restricts competition only in the relevant market, and restricts competition only to the same type of trade or commerce. ² That is not a broad escape hatch for standard employment covenants. It is a transaction-specific lane, and even inside that lane the bill insists on tailoring. ²
That narrow transactional exception is especially important in Michigan because courts have historically treated sale-of-business restraints differently from ordinary employment restraints. A Michigan business court decision from 2026 explained that MCL 445.774a, by its terms, addresses agreements between an employer and an employee and “says nothing of covenants made in connection with the sale of a business,” while also emphasizing that Michigan has historically recognized that employment contracts and business-sale contracts must be treated differently.⁵ That historical distinction matters because some employers and deal lawyers may assume a business-sale covenant can still be drafted the old way so long as it is packaged into deal documents. HB 4040 suggests a much narrower path. If enacted, it would bring affirmative statutory conditions into that sale-of-business space and would make it much harder to rely on the historical breadth of commercial restraint doctrine. In that sense, the bill is not only anti-noncompete in the employment setting. It is also a narrowing measure for transactional covenants that once enjoyed a more forgiving analytical framework. ² ⁵
The provision that should command the most attention from employers, however, may be subsection (6). According to the introduced text, the amended section “applies to a noncompete agreement that is entered into before, on, or after the effective date” of the amendatory act, and the act would take effect 90 days after enactment. ² That drafting choice is why employers are right to worry about existing agreements rather than only future agreements. This is not a bill that appears limited to contracts signed after a certain date. On its face, it is written to reach backward as well as forward. That means businesses with old restrictive covenant portfolios, legacy offer letters, and inherited acquisition paper should not read HB 4040 as a simple onboarding issue. If the bill were enacted substantially as introduced, the harder question would become which existing clauses are suddenly void or newly dangerous to enforce. ²
The bill’s remedial structure is another reason the proposal is so consequential. HB 4040 would not merely declare certain agreements invalid and leave everyone to absorb the consequences. The introduced text says an aggrieved worker may bring an action to recover damages, and that a court shall award a prevailing plaintiff the actual costs necessary to defend against enforcement of the noncompete or to void or limit the agreement, including reasonable attorney fees, along with all income lost as a result of actual or threatened enforcement of the noncompete or its unreasonable terms. ² That is powerful language. It means the risk would not arise only after a company wins or loses a preliminary injunction hearing. The risk could begin when a business threatens enforcement of a clause that later falls outside the statute. Employers often think of restrictive covenants as leverage. HB 4040 is drafted to make careless leverage expensive. ²
Just as important, the introduced text tries to block some of the procedural moves employers sometimes use to shape restrictive-covenant litigation. The bill says certain terms are void and unenforceable, including provisions that purport to waive statutory requirements, require a worker to adjudicate an action in another state, deprive a worker of Michigan substantive protections, or require a worker to pay arbitration costs related to a noncompete dispute. ² This matters because many multistate employers rely on governing-law clauses, forum-selection clauses, or arbitration provisions as quiet but potent leverage devices. HB 4040 is drafted against that playbook. It is not only about whether the covenant itself can be enforced. It is also about where the fight happens, what law applies, and who bears the financial burden of getting into the forum. If enacted, the bill would likely force employers to rethink not just covenant language, but the entire architecture of enforcement strategy. ²
Even so, “effectively ban” is more accurate than “literally prohibit every restrictive covenant.” The bill expressly says it does not limit the enforceability of agreements prohibiting a worker from disclosing confidential information or trade secrets. ² It also preserves a narrow category of nonsolicitation agreements, but only if the worker provides work for the business, receives annual remuneration at a rate above 200 percent of the last published federal poverty line for a family of three, and the agreement expires one year or less after the worker’s last date of work. ² In other words, the bill does not announce that businesses are powerless to protect confidential information, customer relationships, or goodwill. What it does say is that those protections must be drafted as the protection they actually are, not as disguised industry bans. That is a major difference. Employers would still be able to protect secrets and some high-compensation client-contact relationships, but the center of gravity would shift away from post-employment competition bans and toward narrower, conduct-specific restrictions. ²
This is also where the national backdrop matters. During 2024, many employers assumed the biggest noncompete story would be the Federal Trade Commission’s final rule. But the FTC’s own official page now states that the Noncompete Rule is not in effect and not enforceable, that a district court stopped enforcement on August 20, 2024, and that the FTC later took steps to dismiss its appeal in 2025.⁴ So, at least for now, the federal rule is not the operative event. That reality puts renewed weight on state legislatures and state courts. For Michigan employers, HB 4040 is not interesting because it mirrors a federal ban that is already in force. It is interesting because, in the absence of an enforceable federal rule, Michigan’s own statute remains the controlling law today, and Michigan’s own Legislature could be the institution that changes the rules tomorrow. ¹ ⁴
What, then, does HB 4040 mean for employers now, before enactment? First, it does not mean businesses should behave as though every noncompete in Michigan is already void. That would overstate the current law. Existing Michigan law still governs today. ¹ ³ A company that has a carefully drafted covenant tied to a legitimate competitive interest is still operating in a legal system that recognizes the enforceability of reasonable noncompetes and allows courts to narrow overbroad ones. ¹ But it would be a serious mistake to stop the analysis there. The existence of a proposal like HB 4040 changes the practical environment even before enactment because it highlights where the legal and political pressure is building. It also exposes the paper that would be most vulnerable if the bill passes with retroactive language intact. A prudent employer therefore should not assume that because the statute has not changed yet, nothing meaningful has changed for planning purposes. ¹ ² ³
In practical terms, this is the moment for employers to separate what they are truly trying to protect from the habits they have inherited. Many organizations say they “need a noncompete” when what they really need is a tighter confidentiality regime, a cleaner trade secret protocol, better customer-list governance, stronger return-of-property obligations, narrower access controls, or a carefully structured nonsolicitation clause for a limited set of high-compensation personnel. HB 4040 pushes that conversation to the surface. The introduced text expressly preserves trade secret and confidentiality protections and preserves only a tightly defined nonsolicitation category. ² That statutory architecture is a signal. It tells employers where Michigan lawmakers appear willing to tolerate restraints and where they are not. Businesses that use the bill as an opportunity to refine the fit between the interest protected and the restriction imposed will be in a better position whether or not the bill becomes law. ²
That refinement effort should begin with old forms, not just new ones. Because HB 4040 is drafted to apply to agreements entered into before, on, or after the effective date, an employer that has grown through acquisitions, leadership turnover, or decentralized contracting may be sitting on a patchwork of legacy restrictions far broader than anyone at headquarters realizes. ² One division may still use a five-year covenant from a predecessor company. Another may rely on a contractor agreement that was never reviewed by employment counsel. A third may use a bonus or repayment clause that does not read like a noncompete at first glance but could be argued to “penalize” a worker for competitive employment. Under a functional statute, those documents do not stay invisible just because they are old or housed outside HR. The real exposure in a proposal like HB 4040 often lies in the forgotten paper, not the forms currently under active review. ²
Employers should also pay careful attention to enforcement tone. Under the introduced text, a prevailing worker could recover costs and lost income resulting from actual or threatened enforcement. ² That language should cause businesses to reconsider the reflexive cease-and-desist letter, the aggressively worded separation reminder, or the executive demand that outside counsel “send something scary” before the facts are fully developed. If a covenant’s enforceability is doubtful even under current law, or if it would plainly be vulnerable under HB 4040’s framework, the business should think hard about whether the better approach is to pivot toward trade secret preservation, confidentiality enforcement, device forensics, customer-communication strategy, or unfair competition claims. A future statute that punishes overreaching would reward disciplined factual analysis and penalize bluffing. Even before enactment, that is a useful management lesson. ²
For employers involved in transactions, the message is more nuanced but no less important. Michigan has historically treated business-sale restraints differently from ordinary employee noncompetes, and that distinction still matters.⁵ Yet HB 4040 suggests that sale-related covenants would survive only if they are unmistakably tied to the sale, the worker’s status fits the statutory gateway, and the restraint is carefully tailored to the relevant market and the same trade or commerce. ² ⁵ That means sloppy drafting would become more dangerous, not less, in deal settings. A covenant that is supposed to protect purchased goodwill should look like a goodwill-protection covenant, not like an employment noncompete pasted into closing papers. The more the documents resemble ordinary employment restrictions, the easier it would be for an opposing party to argue that the covenant does not belong in the sale-of-business exception at all. ² ⁵
Stepping back, the best way to think about HB 4040 is not as a technical amendment but as a policy inversion. Current Michigan law begins from permission and asks whether the restraint is reasonable. ¹ HB 4040 begins from prohibition and asks whether the restraint fits a narrow exception or survives as some other kind of permissible protection. ² That is why the proposal feels like an effective ban even though it is not a literal abolition of every post-employment restriction. For the ordinary employer that wants to stop a departing employee, contractor, intern, or apprentice from joining a competitor simply because that person knows the business well, the answer under the introduced bill would be mostly no. For the employer that wants to stop misappropriation of trade secrets, misuse of confidential information, or a carefully bounded solicitation effort in a limited and highly compensated setting, the answer may still be yes. ²
So where does that leave employers now? It leaves them in a period of legal continuity but strategic transition. The law on the books today is still Michigan’s existing reasonableness-based framework, and the official legislative record does not show HB 4040 has passed either chamber. ¹ ³ But the introduced text is strong enough, retroactive enough, and specific enough that waiting for a governor’s signature before doing any preparation would be risky management. ² The employers best positioned for whatever comes next will be the ones that start now to identify which protections truly matter, strip out unnecessary restraint language, tighten confidentiality and trade secret controls, confine any remaining customer-protection clauses to what can be defended on their own terms, and treat old noncompete paper as an enterprise-wide risk issue rather than a drawer full of historical forms. If HB 4040 stalls, that work still improves drafting quality. If it passes, that work may be the difference between an orderly transition and a scramble. ¹ ² ³
In the end, the most accurate answer is this: Michigan has not yet banned noncompetes, but HB 4040 would, if enacted substantially as introduced, effectively end the conventional employment noncompete as most Michigan employers have known it. The bill’s broad worker coverage, functional definition of restraint, retroactive application, damages remedy, and anti-evasion provisions are all written to do more than trim abuse at the margins. ² They are written to change the default rule. Employers should read the bill with urgency, but not with panic. The right response is neither denial nor overstatement. It is disciplined preparation anchored in what Michigan law allows today what HB 4040 would change tomorrow, and what business interests can still be protected without relying on broad bans on future work. ¹ ² ³ ⁴ ⁵
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Footnoted Sources
1- BorgWarner PDS (Anderson) LLC v. Devine, Michigan Business Court, Case No. C06-2024-205739-CB, Opinion dated May 6, 2025, quoting and applying MCL 445.774a. https://www.courts.michigan.gov/499800/siteassets/business-court-opinions/c06-2024-205739-cb(05.06.25).pdf
2- House Bill No. 4040, Michigan Legislature, 2025–2026 Session, introduced bill text for the proposed amendment to MCL 445.774a. https://www.legislature.mi.gov/Bills/Bill?ObjectName=2025-HB-4040
3-Michigan Legislature, House Bill 4040 of 2025, public bill history and House Committee on Economic Competitiveness committee records, reviewed April 21, 2026. https://legiscan.com/MI/bill/HB4040/2025
4- Federal Trade Commission, “Noncompete Rule,” official rule summary page, reviewed April 21, 2026. https://www.congress.gov/crs-product/LSB11159
5- Michigan Business Court opinion discussing the distinction between employment noncompetes and sale-of-business restraints, Case No. C17-2025-20949-CBB, opinion dated January 28, 2026. https://milawyersweekly.com/news/2026/02/13/michigan-non-compete-asset-purchase-enforcement/