FTC Votes to Ban Non-Competition Agreements!
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APPLIES TO All For-Profit Employers and Independent Contractors |
EFFECTIVE September 4, 2024 |
QUESTIONS? Contact HR On-Call |
Quick Look
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Discussion
Ever since January 2023, when the Federal Trade Commission (FTC) unveiled its proposed rule to ban virtually all non-compete agreements, employers have been eagerly anticipating when or if the ban would go into effect. The wait is now over as the FTC voted 3-2 on April 23, 2024 to approve the final rule which does indeed broadly ban almost all non-compete clauses. The FTC explained that non-compete clauses are unfair methods of competition in violation of Section 5 of the FTC Act. Among the negative impacts to competitive market conditions, the FTC named inhibition of new business formation and innovation, inhibit efficient matching between workers and employers, and increased market concentration and higher prices for consumers.
Key components of the final rule are:
Non-Compete Definition. Section 910.1 of the final rule defines a 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” seeking or accepting work after the conclusion of employment or operating a business after the conclusion of employment. The broad term “functions to prevent” could apply to non-disclosure agreements, training repayment provisions, non-solicitation agreements, or company policies that are overbroad and could be interpreted to prevent a worker from seeking or accepting work after the conclusion of employment or operating a business after the conclusion of employment.
Affected Workers. All current and former workers are covered by the final rule. This includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. “Senior executives” or workers who are in a policy-making position and earning at least $151,164 annually with non-compete clauses in effect prior to the effective date of the final rule can still have their non-compete clauses enforced against them. However, after the effective date, employers are prohibited from entering into new non-compete clauses for senior executives.
Notice Requirement. Employers must notify workers with non-compete clauses that the provisions are unenforceable. The notice must be on paper and delivered by hand, mail, email, or text message but must identify the person who entered into the non-compete with the worker. Model language for the notice is included in the final rule.
Exceptions. There are only two limited exceptions to the ban in the final rule. First, the ban does not apply in the circumstances of a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Second, the ban does not apply where a cause of action related to a non-compete accrued prior to the effective date. Less clear is Section 910.3(c) which states it is not an unfair method of competition for a party to enforce or attempt to enforce a non-compete where there is a good-faith basis that the final rule is inapplicable.
Effect on State Law. The final rule supersedes all state laws, regulations, orders, and interpretations that may be inconsistent with the final rule. State laws can still offer greater protections to workers than the FTC final rule.
What should employers do now? The guidance has not changed much from when the rule was first proposed. Employers should note the FTC’s ban follows recent trends in states moving towards either outright banning non-competes, like California, or creating additional restrictions on the applicability and enforcement of non-competes. Employers should evaluate their ability to comply if the final rule survives legal challenges and goes into effect without significant changes. If the goal of non-competes is to protect a company’s confidential information and trade secrets, other clauses can still be effectively used so long as they do not run afoul of the final rule. Carefully tailored policies and confidentiality and non-solicitation clauses are enforceable if they are not overly broad. Even the FTC acknowledged there are several alternatives to non-competes that are still enforceable and protect proprietary and other sensitive information, like non-disclosure agreements. Employers should consult with their legal counsel now to determine the extent of the impact to their business and proactively tailor their restrictive covenants to be compliant in the event the final rule goes into effect and survives legal challenges.
Action Items
- Review the final rule here.
- Determine affected workers or independent contractors who will need to be provided with notice of non-enforcement.
- Review restrictive covenants and confidentiality agreements with legal counsel for applicable updates.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2024 ManagEase