On April 23, 2024, the Federal Trade Commission (FTC) adopted a final rule that bans noncompete agreements with employees, independent contractors and other workers in the United States in most circumstances. The final rule differs, in several respects, from the FTC’s January 2023 proposed rule.
Status of the Final Rule
Multiple lawsuits have already been filed challenging the final rule as unlawful, and many believe there is a good chance that the final rule will not survive those legal challenges. But pending a decision invalidating or staying the final rule, the rule will go into effect 120 days after publication in the Federal Register (the “effective date”).
Content of the Final Rule
Among other things, the final rule:
- Prohibits entering into non-compete clauses with any worker after the effective date.
- Non-compete clauses entered into before the effective date (“existing non-compete clauses”), for all workers except senior executives will become unenforceable after the effective date. (In other words, after the effective date, existing non-competes with senior executives can remain in force, but existing non-competes with all other workers cannot.)
- For existing non-compete clauses that are invalidated by the final rule, the employer (or other person) who entered into the non-compete clause with the worker must provide clear and conspicuous notice to the worker, on or before the effective date of the rule, that the clause will not be, and cannot legally be, enforced. The notice must be in writing, identify the person who entered into the non-compete with the worker and be delivered to the worker by hand, mail, email, or text message. The final rule provides model language employers can use for such notice, and employers may satisfy this notice requirement by sending a mass communication to current and former workers.
The final rule defines “worker” broadly to include any natural person who works or worked in paid or unpaid positions, without regard to job title or job classification under any other federal or state law. The term encompasses employees, independent contractors, and sole proprietors who provide a service to a person subject to the FTC’s jurisdiction. The term also includes “a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.”
The definition of “senior executive” and its carveout were not contained in the FTC’s proposed rule. The FTC defines “senior executive” under the final rule as a worker who:
- Received total annual compensation (which does not include discretionary compensation) of at least $151,164 in the preceding year; and
- Was in a policy-making position. “Policy-making authority,” for purposes of a “policy-making position,” is limited to having “final authority to make policy decisions that control significant aspects of a business entity or common enterprise”; it does not include authority “limited to advising or exerting influence” over such policy decisions or “having final authority to make policy decision for only a subsidiary of or affiliate of a common enterprise.”
Exceptions to the Final Rule
The FTC lists two important exceptions to its final rule:
- The final rule will not apply to a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of the business entity’s operating assets.” Unlike the proposed rule, the final rule does not require that sellers have at least a 25% ownership interest for the exception to apply.
- The final rule will not apply to a cause of action that accrued prior to the effective date.
In explaining the second exception, the FTC noted: “[a]ction taken before the effective date to enforce an existing non-compete or representations made before the effective date related to an existing non-compete are not an unfair method of competition.”
Other Exclusions from the Final Rule
Even if the final rule is upheld, there are other forms of restrictive covenants, such as non-solicitation and confidentiality (a/k/a non-disclosure) provisions, which are not prohibited by the final rule unless they are “so broad or onerous” as to functionally prohibit or penalize a worker from seeking or accepting other employment after they leave their job. And there are other laws, such as trade secrets laws, that employers can continue to use to protect their legitimate business interests. Moreover, there are some businesses who are not subject to the FTC’s jurisdiction, and thus the rule would not apply to them (for example, certain non-profits, banks, federal credit unions, and air carriers).
Conclusion
Given the complexity of these issues and how quickly things may change, we recommend companies seek legal guidance about how they can continue to protect their legitimate business interests. Trenam Law’s Employment Law Group is happy to assist clients with these issues.
