by Renee Mielnicki, Esquire
You heard correctly! The U.S. Federal Trade Commission (FTC) voted on April 23, 2024, to issue their final rule to ban most non-compete clauses in employment contracts. This groundbreaking move is expected to have far-reaching impacts on businesses and employees across the nation. The effective date of the final rule is 120 days after publication in the Federal Register (not 120 days after the FTC’s announcement). After the effective date, non-compete agreements are banned nationwide with very limited exceptions.
Agreements Covered
The final rule relates to non-compete agreements which generally are agreements or clauses in agreements that prohibit an employee from working for or operating a business that competes with their employer’s business after they leave employment.
Some of our clients use non-solicitation agreements rather than non-competes with their employees. Those agreements don’t prohibit where an employee can work like a non-compete, but rather restrict soliciting clients or employees when moving to future employment. It’s not clear from the new rule if non-solicitation agreements are prohibited as well. We expect litigation will come around this issue which will bring clarity to it.
The Ban is Wide Reaching
This non-compete ban applies to more than employees. It also applies to independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer, including a natural person, partnership, corporation, association, which effectively includes all persons or businesses operating for profit.
Exceptions to the Ban are Limited
As stated above, this ban is very broad and is nationwide. There are only a few very limited exceptions to the ban:
- Senior Executive exception – This exception only applies to non-compete agreements in effect prior to the effective date of the final rule. It will not apply to any non-competes entered into with a Senior Executive after this final rule becomes effective, which again is 120 days after the final rule is published in the Federal Register. The rule defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments).
- Sale of business exception – the final rule allows a non-compete agreement entered into with a seller of a business entity as long as the sale involves the disposition of the person’s ownership interest in the business entity, or of all or substantially all of a business entity’s operating assets.
- Non-competes in litigation – Many know that non-compete agreements can be litigated between the parties, usually after a violation occurs and enforcement is needed. An exception will apply to this ban where a cause of action arises prior to the effective date of the rule. In other words, the ban won’t apply to non-competes being currently litigated.
- Good faith exception – Lastly, the rule provides that it is not an unfair method of competition for a person to enforce or attempt to enforce a non-compete clause where the person has a good-faith basis to believe that the final rule is inapplicable.
Notice is Required to Workers with a Non-Compete
The final rule requires employers to provide notice to workers who have entered into an existing non-compete. The notice must clearly state that the non-compete agreement will not be enforced against them in the future. The notice must identify the person who entered into the non-compete with the worker. Additionally, the notice must be on paper delivered by hand or by mail; or be delivered electronically by email or by text message. To aid employers’ compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate to workers. That model notice can be found here: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
Next Steps for Employers
The FTC’s announcement of their final rule is not the end of this story.
The U.S. Chamber of Commerce issued a press release the same day the FTC released the new rule. In it, the Chamber vowed to challenge the FTC’s decision in court. The release stated, “The Federal Trade Commission’s decision to ban employer non-compete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.” We expect to see legal challenges from more than just the Chamber. Since it’s unclear how many may challenge the rule in court or what the outcome may be, employers should plan to issue the required notice mentioned above to their employees before the rule becomes effective.
More to Come from Keystone
We will provide further updates on this topic as they develop which may include updates once the rule is published in the Federal Register, its formal effective date, and any legal challenges that may delay or invalidate this new rule. In addition, while the FTC has provided a model notice for employers to send to employees with an existing noncompete, when the effective date has been established, we will be issuing a follow up blog with our own notice that complies with the rule for use by our employers.
In the meantime, if you are an employer with questions about this or any other HR issue, our Risk Management Division is here to help. Contact us at 855-873-0374 or email hrhelpline@eastcoastrm.com.
Disclaimer: The information provided on this website is for informational purposes only and not for the purpose of providing legal advice. Use of and access to this website does not create an attorney-client relationship between Keystone’s Risk Management Division or our employment attorney and the user or browser.
