As you may have already heard, on April 23, 2024, the Federal Trade Commission ("FTC") issued a final rule banning most non-compete clauses in employment contracts in the U.S. ("Final Rule").
This is a big deal—and we do not want to minimize it. But there is no need to panic! There are still options for protection and there is still plenty of time to think this through. Now is the time to review your strategy for post-employment restrictions.
The Final Rule is scheduled to take effect 120 days after publication in the Federal Register, which as of now means late August 2024. It is possible that enforcement will be enjoined until these legal challenges are sorted. There is immense interest in this Final Rule, and we would not be surprised if the issues goes all the way to the Supreme Court for resolution.
That said, below is an overview of the key points of the Final Rule and its implications for employers and workers:
What is a Non-Compete Agreement?
Generally speaking, a non-compete is defined in the Final Rule as a contract between an employer and a worker that restricts the worker from seeking or accepting work from a different employer/company or from opening their own competitive business.
Why did the FTC Ban Non-Competes?
The short answer is the FTC determined that non-competes are an unfair method of competition because it found that they restrict employees from changing jobs, depress wages, stifle innovation, and prevent new businesses from being formed.
The Unenforceability of Existing Non-Competes:
Assuming the FTC's ban goes into effect, employment-based non-competes in effect prior to the effective date will become unenforceable for all employees except "senior executives." The Final Rule defines the term "senior executive" as an employee who earns more than $151,164 annually and who is in a "policy-making position." The senior executive threshold calculation includes an employee's salary, bonuses, and commissions, and excludes fringe benefits, retirement contributions, and insurance premium payments. And "policy-making position" means an employee who has the authority to make policy decisions controlling "significant aspects of a business entity or common enterprise." The exemption is intended to be narrow and the Final Rule expressly carves out positions that only have the ability to advise or exert influence over such policy decisions, and positions that only have final authority for a subsidiary or affiliate. It is also worth noting that the senior executive exemption only applies to non-competes in effect before the effective date of the Final Rule (probably August 2024).
The Final Rule also permits certain non-competes in connection with the sale of a business, and non-solicitation agreements that do not penalize or prevent the worker from accepting work with a competitor or starting their own business.
Notification Requirements for Employers:
When (if?) the Final Rule becomes enforceable, employers will be required to notify current and former workers that any non-compete they previously signed is no longer enforceable. The Final Rule also includes model language that employers should consider using to provide this notification.
The full text of the Final Rule can be accessed here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
