FTC Bans Most Non-Compete Agreements
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On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that bans most non-compete agreements between employers and their workers. The FTC found that most non-compete agreements are unfair methods of competition in violation of the Federal Trade Commission Act.
Currently, the final rule will go into effect on September 4, 2024. Legal challenges to the rule have already begun which may delay the rule’s effective date. Given the uncertain legal future of the rule, employers would be well served to monitor the status of the rule to determine if, and when, they will need to comply with the rule’s requirements.
Most Non-Compete Agreements are Prohibited
Under the final rule, after the rule’s effective date, it is an unfair method of competition, and therefore a violation of the FTC Act, to:
- Enter into or attempt to enter into a non-compete clause with a worker;
- Enforce or attempt to enforce a non-compete clause with a worker; or
- Represent that a worker is subject to a non-compete clause.
The final rule defines a non-compete clause as:
- A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.
A “term or condition” includes, but is not limited to, a contractual term or workplace policy, whether it is written or oral.
Worker is defined to cover more than just employer-employee relationships. A “worker” is a natural person who works or previously worked, whether paid or unpaid, without regard to the worker’s title or worker’s status under any other State or Federal Laws, including but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a person a service.
Exception for Senior Executives
While subject to restrictions, non-compete agreements with “senior executives” are treated differently under the final rule. After the final rule’s effective date, it is an unfair method of competition and therefore a violation of the FTC Act, to:
- Enter into or attempt to enter into a non-compete clause with a senior executive;
- Enforce or attempt to enforce a non-compete clause entered into with a senior executive after the effective date; and
- Represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.
The final rule permits the continued enforcement of non-compete agreements with senior executives if those agreements were entered into before the final rule’s effective date.
A senior executive is a worker who:
- Was in a “policy-making position;” and
- Whose total annual compensation was:
- At least $151,164 in the preceding year;
- At least $151,164 when annualized if the worker was employed during only part of the preceding year; or
- at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
A “policy-making position” is a business entity’s president, chief executive officer or equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.
An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise may have a policy-making position if they are able to exercise policy-making authority for the entire common enterprise. An officer of a subsidiary or affiliate of a business entity that is part common enterprise does not have a policy-making position if their policy-making authority is limited to just the subsidiary or affiliate.
“Policy-making authority” is the final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over policy decision or having final authority to make policy decision for only a subsidiary of or affiliate of a common enterprise.
Additional Exceptions
Sale of a Business
The final rule does not apply to non-compete clauses entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
Existing Cause of Action
The final rule does not apply when a cause of action related to a non-compete clause accrued prior to the effective date.
Good Faith
The final rule contains an exception for enforcing or attempting to enforce a non-compete clause or making representations about a non-compete clause, when a person has a good-faith belief to believe the final rule does not apply to that situation.
Notice Requirement
The final rule requires that workers covered by a non-compete clause be provided clear and conspicuous notice by the effective date that the non-compete clause will not be, and cannot legally be, enforced against the worker. This requirement does not apply to senior executives who can have existing non-compete clauses enforced as discussed above.
The notice must:
- identify the person (business entity, organization, sole proprietor) who entered into the non-compete clause with the worker; and
- be delivered:
- by hand to the worker;
- by mail to the worker’s last known street address;
- by email to the worker at their work email address or last known personal email address; or
- by text message to the worker’s mobile telephone number.
If a person cannot hand deliver the notice and does not have record of a worker’s street address, email address, or mobile telephone number, the person does not have to provide that worker with a notice.
The FTC included model language in the final rule that can be used to satisfy the notice requirement.
Implications for Businesses
In preparation for the possible implementation of the ban on non-complete agreements, businesses should assess how they safeguard proprietary and confidential information. An alternative approach to protecting intellectual property includes non-disclosure agreements, confidentiality clauses, and restrictive covenants.
For more information, see Non-Compete Clause Rule: A Guide for Businesses and Small Entity Compliance Guide.
Key Takeaways:
Employers would be well served to monitor the status of the FTC’s final rule banning non-compete agreements. There have been several lawsuits filed to block the rule from going into effect, including one by the U.S. Chamber of Commerce. Pending the development of the legal challenges against the rule, employers should take steps to prepare to comply with the rule’s requirements by September 4, 2024.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.
