Federal Trade Commission Issues Final Rule Barring Non-Compete Agreements
On April 23, 2024, the Federal Trade Commission (FTC) held an open meeting and voted 3-2 (along party lines) to issue a Final Rule that bans post-employment non-compete agreements. According to the FTC, approximately 30 million people nationwide (1 in 5 workers in the U.S.) are bound by non-compete clauses.
The FTC Final Rule is the product of an Executive Order issued by President Biden in July 2021 that directed the FTC to either ban or limit non-compete agreements in order to promote competition in the U.S. economy, increase wages, make it easier for workers to change jobs, and eliminate aggressive tactics by large companies.
Non-compete agreements are designed to restrict workers from leaving their employment to compete for a period of time after their separation. Generally, these prohibitions apply within a certain geographic area where an employer maintains its business operations. Proponents assert that non-competes are necessary to protect employer trade secrets and customer relationships. Such restrictions also allow employers to invest in their workers by providing access to training and valuable information relating to the employer’s business.
The enforceability of a non-compete agreement has historically been governed by state law. In the vast majority of states, non-compete restrictions are allowed as long as they are deemed reasonable to protect the legitimate interests of the employer. The FTC Final Rule seeks to overturn judicial decisions and statutory authority adopted in numerous states.
What do you need to know about the new FTC Final Rule:
- The new rule becomes effective 120 days after it is published in the Federal Register. Legal challenges have already been initiated including a lawsuit filed by the U.S. Chamber of Commerce against the FTC in Texas claiming that the FTC lacks constitutional and statutory authority to issue the Final Rule. Legal challenges could effectively block or delay the implementation of the new rule.
- A “non-compete clause” is defined under the rule as “a 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.”
- The new rule by definition would not apply to non-disclosure or confidentiality agreements nor does it cover post-employment restrictions relating to the solicitation of customers and employees. Customer-based restrictions that prevent an individual from soliciting or providing competitive products and services to customers may still be enforced as provided under state law, as well as restrictions relating to the solicitation and hiring of employees. However, the term “functions to prevent” in the definition of a “non-compete clause” is aimed at prohibiting restrictions that are so broad or onerous that they have the same functional effect as a non-compete.
- The new rule covers current and former ”workers” regardless of their title or status. It not only covers employees but applies to independent contractors and any person who operates as a sole proprietor and provides services to clients and customers.
- The new rule bans all new post-employment non-compete agreements between an employer and the worker, regardless of the industry or type of worker after the effective date.
- The ban on non-competes does not apply to an existing post-employment non-compete agreement with a senior executive. A senior executive is generally defined as an individual “earning more than $151,164 annually” and who is “in a policy-making position.”
- The new rule contains several exclusions and does not apply to non-compete agreements entered into: (i) in connection with the “bona fide“ sale of a business regardless of the percentage of ownership; (ii) between a franchisee and franchisor; and (iii) with certain non-profit organizations who are not subject to the FTC’s jurisdiction.
- The new rule also does not apply to a legal cause of action related to a non-compete clause that accrued prior to the effective date of the new rule.
- For purposes of complying with the new rule, it is not necessary for an employer to legally rescind or modify an existing non-compete agreement. However, the employer must provide notice that the worker’s post-employment non-compete is no longer enforceable. This notice will need to be provided by the effective date of the new rule.
What happens next?
As stated above, the new rule becomes effective 120 days after publication in the Federal Register. The U.S. Chamber of Commerce has already initiated legal action and other business groups will also challenge the new rule. This may ultimately delay or prevent the new rule from taking effect.
If the final rule is not blocked by the courts, employers will need to make plans for compliance, including issuing proper notices to employees by the effective date. Employers who utilize non-competes may need to consider alternative restrictions for purposes of protecting customer and employee relationships as well as confidential information and trade secrets.
Our Labor and Employment Group will continue to keep you posted regarding any legal developments concerning the FTC Final Rule.
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