On April 23, 2024, the Federal Trade Commission (“FTC”) announced a final rule (the “Final Rule”) banning most post-employment non-compete clauses. If the Final Rule goes into effect, it will bring sweeping change to employers’ contracts with workers and dramatically restrict employers’ ability to prevent workers from competing with their former employer.
Employers will have to think strategically about how to best protect their business interests vis-à-vis former workers without the use of non-compete clauses. This article answers some of the most significant questions that employers may have about the Final Rule.
What is a “non-compete clause” under the Final Rule?
The Final Rule defines “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 (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” In turn, “‘term or condition of employment’ includes, but is not limited to, a contractual term or workplace policy, whether written or oral.” These definitions are intentionally broad.
Are there any exceptions to the ban on non-competes?
Yes, there are several limited exceptions to the Final Rule’s prohibition on non-compete clauses. First, there is a carveout that allows existing non-competes with senior executives to remain in place. Under the Final Rule, “senior executive” refers to workers earning more than $151,164 who are in a “policy-making position” as defined in the Final Rule. Note, however, that this exception covers only pre-existing non-compete clauses, and that the Final Rule prohibits new non-competes clauses with senior executives. Second, the Final Rule does not prevent employers from enforcing violations of non-compete clauses where the cause of action accrued prior to the Final Rule’s effective date. Third, the Final Rule does not apply to non-compete clauses entered into pursuant to the bona fide sale of a business entity.
Does the Final Rule prohibit non-competes that are already in place?
Subject to the above exceptions, the Final Rule applies both prospectively and retroactively to ban pre-existing non-competes with current and former workers.
Does the Final Rule only apply to employees?
No, the Final Rule does not only apply to employees. Rather, the Final Rule applies more expansively to “workers.” The term “worker” encompasses anyone who “works or who previously worked, whether paid or unpaid,” and may include, without limitation, employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service.
Does the Final Rule ban other forms of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements?
The Final Rule does not impose an outright ban on other restrictive covenants, such as non-disclosure agreements and non-solicitation agreements. However, the Final Rule does ban other restrictive covenants to the extent that they are functional non-competes, meaning that they prevent a worker from seeking or accepting work, or starting a business, after they leave their job.
Are any businesses exempt from the Final Rule?
The FTC promulgated the Final Rule pursuant to the Federal Trade Commission Act (“FTC Act”). The ban on non-competes therefore does not apply to employers that are outside the FTC’s jurisdiction under the FTC Act. This includes, for example, bona fide nonprofits, banks, savings and loan institutions, common carriers, air carriers, and some entities subject to the Packers and Stockyards Act.
How are state laws affected?
The Final Rule does not limit or affect enforcement of state laws that restrict non-competes where those laws do not conflict with the Final Rule, but it preempts conflicting state laws.
When will the Final Rule go into effect?
The Final Rule is set to go into effect 120 days following its publication in the Federal Register. As of the date of this article, publication has not occurred; however, it should be expected soon.
Could anything stop the Final Rule from going into effect?
Yes, we expect a number of challenges to the Final Rule, at least some of which will be lawsuits in which the court is asked to enjoin (i.e., stop) the Final Rule from becoming effective. The plaintiffs in these lawsuits will likely challenge the Final Rule on three main grounds: (1) that the FTC Act does not grant the FTC with the necessary authority to promulgate the Final Rule; (2) that the validity of non-competes is a “major question” that Congress did not give the FTC authority to address; and (3) that any grant of authority from Congress was impermissible. Several lawsuits have already been filed, including one in the Eastern District of Pennsylvania. However, it could take quite some time for lawsuits to work their way through the courts.
What do employers have to do to give workers notice of the Final Rule?
Before the effective date, employers must notify each worker who is subject to a non-compete clause prohibited under the Final Rule that the non-compete clause is no longer enforceable. The notice may be delivered: (1) by hand, (2) by mail at a worker’s last known personal street address, (3) by email, or (4) by text message.
What should employers do before the Final Rule goes into effect?
Employers should closely monitor the deadlines for compliance with the Final Rule, as well as the status of pending challenges to the Final Rule, as there is a chance that the Final Rule will be enjoined based on the court challenges. Employers should also consider the implications of the Final Rule on any applicable state laws.
Further, we recommend that employers determine whether current and former workers non-competes violate the Final Rule and collect contact information for the required notice. Such analysis should entail an examination of whether any impacted workers are “senior executives” whose pre-existing non-competes will remain enforceable. However, we do not advise sending out notices until it becomes more clear when and if the Final Rule will go into effect.
In addition, we advise employers to begin preparing for a world in which non-competes are generally prohibited. For example, employers should determine whether any post-employment restrictive covenants will remain effective and consider alternative ways to protect their legitimate business interests without running afoul of the Final Rule, such as having workers enter into non-disclosure agreements and non-solicitation agreements that do not operate functionally as a non-compete.
If you have any inquiries on the Final Rule, including on how your business can satisfy the Final Rule, please contact members of SGK’s Corporate Services or Employment Services Groups.