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New FTC Rule to Ban Non-Compete Clauses: Impact on Employers and Employees

Non-Compete Contract and Pen

The Federal Trade Commission (FTC) has issued a new Rule banning non-compete provisions. This Rule will go into effect in approximately August of 2024, provided there are no court challenges that stop it. 

We have received a lot of questions from our clients about what these changes mean for them. Please see the summary of the Rule below for your convenience. 

Summary of FTC Rule Banning Non-Competes

  • The FTC ban on non-compete applies to all workers, including employees, contractors, interns and volunteers
  • Existing non-competes will become unenforceable, except for those with “senior executives” who earn $151,164 per year or more and are in a policy-making position
  • Employers may not enter into new non-competes with any workers once the Rule takes effect, including senior executives
  • The Rule does not apply to the sale of a business
  • The Rule is set to take effect August 21, 2024, however, it is already being challenged in court, which may delay implementation
  • Employers and employees should prepare by assessing any non-compete agreements they have entered into

Background on FTC Rule Banning Non-Competes

The FTC estimates that approximately 30 million American workers are subject to a non-compete agreement. In response to growing concerns about unfair competition, the FTC issued a final rule on April 23, 2024, that will ban non-competes (the “Rule”).

The Rule’s effective date is 120 days from the date of its publication in the Federal Register, so late August of this year. The Rule effectively bans existing and future non-compete agreements between an employer and non-senior/non-executive employees or other workers. Existing non-compete agreements for “senior executives” will remain permissible, but after the effective date, future non-compete agreements will be banned for these employees as well.

Substantial legal challenges to the Rule are likely, and at least one has already been filed. Employers and employees should, however, begin to evaluate the impact of the Rule on their existing and future agreements.

The full text of the Rule can be found here and a summary fact sheet can be found here

Ban on Future Non-Competes For All Workers

The Rule prohibits employers from entering into a non-compete agreement with any worker after the Rule goes into effect. 

A “non-compete” includes any clause that, as a condition of employment, prohibits a worker, penalizes a worker, or prevents a worker from (a) seeking or accepting work with someone else or (b) operating a business after concluding employment.

The FTC instructs that “appropriately tailored” non-disclosure agreements (NDAs) or training repayment agreements are permissible but warned that overly broad agreements are prohibited if they have the impact of preventing workers from obtaining other employment in the industry or starting a competing business.

This could mean that certain non-solicitation agreements could also be found to be invalid, if they are determined to have the effect of preventing a worker from working in their chosen field. 

The Rule applies to any type of worker (e.g., contractors, interns, volunteers), regardless of whether such individuals are paid.

Existing Non-Competes Will Become Unenforceable; Senior Executive Exception

For most workers, the Rule makes existing non-competes unenforceable. The FTC instructs that employers do not need to formally rescind existing non-competes but will not be permitted to enforce most existing non-competes (or seek to enforce them). 

A non-compete with a “senior executive” that is in effect when the Rule takes effect will be permitted to remain in force. A senior executive is defined as a worker earning more than $151,164 who is in a “policy-making position.” The definition of “senior executive” is narrow. Policy-making positions are narrowly defined and those where the employee has the final authority to make policy about significant aspects of the business. A position where the worker merely advises or exerts influence over decisions, or where the employee makes final policy decisions only for a subsidiary or affiliate of a common enterprise, are not considered senior executive positions under the Rule. 

Employers are required by the Rule to provide written notice to all current and former non-senior-executive workers that have a non-compete by the effective date of the Rule.

The FTC has provided model language for this notice, which advises workers that their non-competes are no longer in effect and that there are no longer any limitations on their ability to work for a company, competitor, or to start their own, even competing, business.

The advantage of using the model language is that the FTC has created a “safe harbor” for employers that do so.  

Exceptions to the FTC Rule Banning Non-Competes

The Rule is inapplicable to a non-compete entered into as a part of a sale of a business. It is also inapplicable to certain agreements between a franchisor and franchisee. The Rule is also inapplicable to non-competes solely outside of the United States. The Rule does not ban a cause of action under a non-compete that accrued before the effective date of the Rule. Similarly, narrowly tailored NDA’s and confidentiality agreements should be permitted so long as they do not have the impact of preventing workers from obtaining other employment in the industry or starting a competing business.

What Does the FTC Non-Compete Rule Mean for Employers and Employees?

The Rule will likely face significant legal challenges even before its effective date, August 21, 2024. There is also a school of opinion that the FTC lacks the authority to issue such a sweeping rule. It is possible, therefore, that a court may enjoin enforcement of the Rule (at least for a while).  

Despite the potential for legal challenges and a delay in its effective date and/or enforcement, employers should consider the impact the Rule will have on their current (and prospective) agreements and take steps to be ready to comply with the Rule if and when it becomes effective. 

Workers should also recognize that existing non-competes may become unenforceable but that as of now, the rule is not effective so non-competes currently stand.

Employer preparation for complying with the Rule should include identifying all current and former workers, interns, volunteers, and independent contractors with non-compete agreements or broad confidentiality, non-solicitation, or repayment agreements or similar agreements.

From there, employers should work with their attorneys to analyze which workers are required to receive notice under the final rule and prepare a system to ensure that notice is provided. Employers may also consider whether less restrictive alternatives—such as a narrowly drafted NDA and/or non-solicitation agreement to address the potential loss of a non-compete agreement.

Please reach out to the Business Law Team at the Geller Law Group for any assistance or questions regarding this evolving matter. 

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