The U.S. Federal Trade Commission (FTC) has enacted a new rule banning "non-compete" clauses/covenants in employment agreements for all employees with the exception of existing agreements involving "senior executives". This new federal rule is effective nationwide and extends to all employees and independent contractors. Non-compete agreements have been banned in California for many years, but California employers need to be aware of the impact on employees and independent contractors working at all facilities, branches, sites, and offices, across the United States.
This new federal rule invalidates existing non-compete agreements, except those covering "senior executives," defined as individuals earning over $151,164 annually who are in a "policy-making position." This federal rule requires employers to give written notice to current and former workers/employees that their non-compete agreements are no longer in effect. The rule defines "noncompete clause" as an agreement, term, or covenant that prohibits workers from working for a competing business, or starting a competing business, after the termination of their employment or services. Importantly, the federal rule's definition of "worker" extends to any employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person or employer, whether paid or unpaid.
Note, this new federal rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity, or a person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets.
This rule has already been challenged in federal court by several organizations, including the US Chamber of Commerce, which is pending. A federal court can issue a preliminary injunction if it determines the FTA exceeded its powers and jurisdiction with this sweeping new rule without supporting federal legislation. The new FTC rule wipes out agreements that have been historically used by US employers for decades to protect against unfair business competition, misuse of confidential business information, and poaching of a company's workforce. This new federal rule could impact millions of workers in the US.
The rule is scheduled to go into effect 120 days following its publication in the Federal Register unless a court issues an injunction blocking enforcement. No date has been specified yet.
Moving forward, employers should consider reviewing their current non-compete (restrictive) covenants to determine if provisions can be added to non-solicitation, non-disclosure, and confidentiality agreements. This will help best serve the business interests of protecting confidential and proprietary information, preventing unfair competition, and poaching of your workforce by a business competitor.
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