What You Should Know About the FTC’s Final Non-Compete Clause Rule
This spring, the Federal Trade Commission (the “FTC”) announced its Final Non-Compete Clause Rule (the “Final Rule”) aiming to ban all new post-employment non-compete clauses while invalidating most existing ones for all workers. Though controversial, the Final Rule is scheduled to take effect on September 4, 2024 (the “Effective Date”).
The Final Rule defines a “non-compete clause” as any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Employers have long utilized non-compete clauses and agreements to protect valuable assets, like trade secrets, and, until recently, non-compete agreements were largely governed by state laws that vary across jurisdictions. The Final Rule, if enacted, will now bring around a fundamental change in how employers protect their assets and workforce stability.
Key Provisions
As we slowly inch toward September, here are some key provisions of the FTC’s Final Rule that business owners should know:
The Final Rule prohibits employers from entering into or attempting to enter into non-compete clauses with workers or representing that a worker is subject to a non-compete clause. The Final Rule does allow employers to maintain existing non-compete agreements with some senior executives, defined as those with a certain annual compensation and in a policy making position for the business, but bars an employer from entering into, or attempting to enter into, a non-compete clause with a senior executive after the Effective Date of the Final Rule.
The Final Rule defines workers as employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service, and persons working for a franchise or franchisors, but not including franchisees in the franchisee-franchisor relationship context.
The Final Rule requires that entities impacted provide notice to workers who are parties to a non-compete agreement that is prohibited by the rule that the non-compete cannot and will not be enforced. Notices must be provided to workers by the Effective Date and can be on paper, by mail, by email, or by text. The FTC provides sample language for these notices here.
The Final Rule exempts and does not apply to non-competes agreements in connection with a bona fide sale of a business or causes of action regarding an existing non-compete that arose before the Effective Date.
The Final Rule only covers employers within the FTC’s jurisdiction, which includes most for-profit entities. Certain employers, including certain banks, saving and loan associations, non-profit organizations, and more, are not in the FTC’s jurisdiction and are not impacted by this ruling.
How Should Employers Prepare?
Employers build businesses on years of experience, information, connections, and more. They dedicate time, resources, and expenses toward onboarding, training, and retaining their employees, so it’s no surprise that the Final Rule is already being challenged. Nonetheless, employers should prepare their businesses for its Effective Date this September.
Though employers are not required to take immediate action until the Effective Date, it is encouraged to review your business’s existing agreements and policies that may contain non-competes and other restrictive covenants. It may be worth determining whether your business has entered into non-competes with any senior executives or would like to execute these agreements with eligible individuals before the Effective Date.
Even if the Final Rule is not enacted come the Effective date, it’s important for employers to take a holistic approach to protecting their valuable information, connections, and workers. Employers can use garden leave clauses, non-solicitation agreements, and confidentiality agreements in addition to their non-compete agreements.
At the very least, the announcement of the Final Rule makes it clear that employers need to be continuously monitoring regulatory activity around the issue while making sure they are in compliance with state laws, which have been evolving and increasingly strict over the past few years.
Frequently Asked Questions
Does the Final Rule impact non-solicit agreements, confidentiality agreements, and other restrictive covenants?
In short, no, the Final Rule does not impact non-solicit agreements, confidentiality agreements, and other restrictive covenants unless they are so broad that they prevent a person from seeking or obtaining other employment or starting a business.
Is the Final Rule retroactive?
Yes, the Final Rule supersedes all existing non-compete agreements that were entered into prior to the Effective Date, except those that were entered into by certain senior executives.
If the Final Rule is enacted, how will it be enforced?
The FTC could initiate an administrative proceeding or seek an injunction in federal district court against any entity that is violating the Final Rule where an injunction is in the public’s interest. Additionally, an aggrieved employee may be able to file action seeking a judgment from the court declaring that any illegal non-compete is unenforceable.
KLH Advisors PLLC is available to review current employee agreements and draft and advise on updated employee agreements to ensure you are in compliance with your state laws and are prepared to be in compliance with this new federal ruling. KLH Advisors PLLC is also available to draft and advise on informational notices to employees required by this Final Rule.
