On April 23, 2024, the Federal Trade Commission (FTC), by a vote of 3-2, approved and issued its much-anticipated final rule (the Final Rule) virtually banning employers’ use of all non-compete clauses. The Final Rule is effective 120 days after the date of publication in the Federal Register.
The following advisory summarizes essential components of the Final rule.
The Final Rule in General
The Final Rule generally prohibits employers from (1) entering into or attempting to enter into a non-compete clause, (2) enforcing or attempting to enforce a non-compete clause, or (3) representing that a worker is subject to a non-compete clause.
What is a “non-compete” clause?
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.
Exceptions and Existing Non-Compete Clauses
Under the Final Rule, a non-compete clause may be entered into by a person pursuant to a bona fide sale of business entity, or the person’s ownership in a business entity, or all or substantially all of a business entity’s operating assets. The Final Rule eliminates the 25% ownership requirement included in the Proposed Rule.
The final rule allows existing non-competes (i.e., non-competes entered into before the Final Rule’s effective date) with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes.
A “senior executive” is a worker who was in a policy-making position and earned total compensation of at least $154,164 in the preceding year or year before termination. A policy-making position means an entity’s president, CEO or equivalent, or other officer of a business or natural person who has final authority to make policy decisions that control significant aspects of a business entity or common enterprise (which does NOT include authority limited to advising or exerting influence over policy decisions or having authority to make policy decisions for only a subsidiary or affiliate of a common enterprise).
Please note that for workers who are not senior executives, existing non-competes are no longer enforceable after the final rule’s effective date.
Notice Requirement
Workers with existing non-compete clauses that would be prohibited under the final rule must be provided with clear and conspicuous notice by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.
Other Types of Restrictive Covenants
Other types of restrictive employment agreements other than non-competes- such as NDAs, non-solicitation agreements, and TRAPs- do not, by their terms or necessarily in their effect, prevent a worker from seeking or accepting work with a person or operating a business after the worker leaves their job. The FTC states that whether any given contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.”
How does the Final Rule interact with State Law?
The Final Rule does not limit or affect the enforcement of State laws that restrict non-competes where the State laws do not conflict with the Final Rule, but it preempts State laws that conflict with the Final Rule.
What’s Next?
The Final Rule is currently facing legal challenges, and the timeline for a resolution is uncertain. Therefore, now is a good time for businesses to look at their current non-competes and to start gearing up to make changes to abide by the Final Rule’s guidelines. That said, implementing changes to adhere to the Final Rule can be deferred until the courts resolve the pending legal challenges.