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What Employers Need To Know About The FTC Ban On Employer Non-Competes

Ward Damon

May 2024

A year and half after the Federal Trade Commission (FTC) proposed a rule banning non-competes, the FTC voted 3-2 in favor of issuing its final rule banning most employee non-compete agreements in the workplace. This prohibits employers from using non-competes for all current and former workers, regardless of the worker’s position, title or status. While the final rule prohibits new non-compete clauses for senior executives, non-compete clauses entered into with senior executives prior to the effective date remain enforceable.

 

While there are a lot of details, here are four key takeaways you should consider:  

  • Employers must give notice to workers who entered into a non-compete clause that the non-compete provisions are not enforceable.
  • Violations of current non-competes can still be enforced after the effective date, so long as the violation occurs before the effective date.
  • The FTC’s final rule voids existing non-compete provisions for all workers other than senior executives beginning 120 days after the rule becomes published.
  • The FTC’s final rule on all future non-competes begins in approximately four months.

If you are an employer with non-compete agreements in place, here are additional details to the FTC’s final rule on non-compete agreements you should know.

 

What is the Effective Date?

 The FTC rule will become effective 120 days after publication in the Federal Register.

That said, legal challenges have already commenced. The same day the rule was announced, a lawsuit was initiated in the U.S. District Court for the Northern District of Texas. The U.S. Chamber of Commerce filed its promised federal lawsuit in the U.S. District Court for the Eastern District of Texas, Tyler Division, seeking injunctive relief from FTC’s enforcement of the final rule. An injunction would halt the enforcement of the Final Rule and (at a minimum) extend the effective date of enforcement. The challenges are largely focused on the lack of statutory authority for the FTC to enact these kind of substantive rules, and particularly for a sweeping rule that affects millions of agreements nationwide.

 

What is Included in this Rule?

The FTC rule bans all true non-compete clauses. This is defined as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting work after the conclusion of employment, or operating a business after the conclusion of employment. As such, a non-compete clause is not just a contractual term but can include any workplace policy, whether oral or written.

While the confusing “functional test for whether a contractual term is a non-compete” (referred to as the “de facto” test) appearing in the proposed rule was removed, supplementary information suggests that non-disclosure agreements, training repayment agreement provisions, and non-solicitation agreements that are overbroad and “function to prevent” a worker from seeking or accepting other work or starting a new business after employment ends could be barred, depending on the precise language of the agreements and the surrounding facts and circumstances. Properly limited non-solicitation and non-interference provisions would not be prohibited. 

 

Exceptions to the Rule:

There are two limited exceptions where the Final Rule does not apply.

The FTC rule does not apply to a non-compete clause in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” The proposed rule’s requirement that the seller be an owner of 25 percent of the entity being sold has been eliminated.

The rule also adds a new exception, stating that it does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”

It also says that it is not an unfair method of competition for a person to enforce or attempt to enforce a non-compete clause where the person has a good-faith basis to believe that the final rule is inapplicable.

 

What happens to Existing Non-Competes?

Some existing non-compete agreements will survive the FTC’s final rule. The major exceptions include: (1) existing agreements for “senior executives” (2) non-competes entered into in connection with the bona fide sale of a business, and (3) non-competes enforced where the cause of action accrued prior to the rule’s effective date. 

For senior executives, those making more than $151,164 in the preceding year and who also meet a “job duties test,” the non-compete will remain in effect until the agreements expire. Employers cannot enter into new non-compete agreements with senior executives, including extending existing agreements, after the rule goes into effect. There are also industry-specific exceptions based on certain industries excepted from the Federal Trade Commission Act (“the FTC Act”). Specifically, the rule does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.

 

The Notice Requirement:  

The FTC requires employers using restrictive covenants to give notice to their workers that the non-compete provision is unenforceable. The notice must identify the person who entered into the non-compete with the worker. Additionally, the notice must “be on paper,” delivered by hand, by mail, by email or by text message. The final rule includes model language employers can use, which can be found here.

 

Moving Forward with the Final Rule:

Employer must be mindful of the FTC’s wide-ranging rule as they move forward with new agreements with their employees.  Although there are no guarantees, based on recent Supreme Court decisions regarding the major questions and non-delegation doctrines, there is a significant chance of the rule being enjoined before it goes into effect.  

Ward Damon attorneys are available to discuss your existing employee agreements and your options moving forward in this uncertain climate.  Please contact Kenneth Rehns at krehns@warddamon.com or Brittany Borck  at bborck@warddamon.com to discuss your agreements and navigating this new rule.

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