FTC Votes to Enact Regulation Outlawing Most Non-Compete Clauses in the Workplace

We last wrote about this almost 18 months ago, when the Federal Trade Commission (FTC) announced the idea. Fast-forward to today (April 23, 2024), and the FTC, in a close 3-2 decision, ratified a definitive regulation that largely prohibits the use of non-compete agreements in employment settings, allowing only a few exceptions. If it survives anticipated strong legal challenges, this new regulation will take effect 120 days after its publication in the Federal Register.

Here’s a quick overview:

New Regulation Scope of the Rule

The newly established rule defines a “non-compete clause” as any employment term that restricts, penalizes, or effectively prevents an employee from seeking or accepting employment elsewhere in the United States after their current employment or from starting a business in the country following their tenure.

This comprehensive ban encompasses all workers, including employees, independent contractors, interns, volunteers, apprentices, and sole proprietors who provide client services. It applies universally to any entity or individual employing others, including partnerships, corporations, and other legal entities under the FTC’s purview.

Impact on Current Agreements

The rule renders current non-compete agreements null for all workers except those classified as “Senior Executives.” Specifically, the rule deems it an unfair competitive practice to initiate or enforce non-compete clauses, except for pre-existing ones involving Senior Executives, depending on the date they were made.

Employers must issue a “clear and conspicuous notice” that these non-compete clauses will not be enforced. The final rule provides safe harbor model language to satisfy this notice requirement with several options, including via hand, mail, email, or text. The safe harbor language is designed so that an employer can send a mass communication to its employees rather than determine which of its employees have non-compete agreements.

Definition of “Senior Executive”

The rule retains specific provisions for senior executives, both before and after the effective date of the final rule, which are expected to be a point of contention and potential litigation. A “Senior Executive” is someone in a decision-making role earning at least $151,164 annually, excluding benefits and other non-wage compensations.

Other Restrictive Covenants

While focusing on non-compete clauses, the FTC acknowledges that other restrictive covenants, like non-solicitation and confidentiality agreements, might be scrutinized under this rule, pending a fact-specific inquiry.

Exemptions and Exceptions

Certain exemptions apply, such as non-compete clauses related to business sales and situations where ongoing litigation involves non-compete enforcement. The rule also allows for a “good faith” exception if there’s a valid reason to believe the ban does not apply.

Interaction with State Laws

This federal rule supersedes conflicting state laws, though states may enact stricter measures regarding non-compete agreements.

Anticipated Challenges and Next Steps

The FTC’s final rule will be subject to legal challenge. In fact, the Chamber of Commerce has already announced it intends to initiate litigation as early as today (Wednesday, April 24). It is less clear how long it may take courts to determine whether the regulation is lawful. Because the regulation, if upheld, requires employers to provide notice to non-Senior Executive employees and former employees subject to non-compete clauses, employers may wish to plan for what providing notice to these employees would require.

Now is also a good time for businesses to take a close look both at existing non-compete clauses and other contractual requirements that may be argued to function as a non-compete under the regulation, including non-disclosure, non-solicitation, and provisions requiring employees to reimburse employers for certain training expenses. While it’s too early to predict the legal outcome of the regulation, employers should prepare for the worst-case scenario but defer implementing changes to address them until the challenges are resolved. Employers should also continue to be strategic in using their non-compete, non-solicitation, and non-disclosure agreements. They should consult with employment counsel to consider multiple options to ensure adequate protection of their confidential information, trade secrets, and goodwill.

If you need help or have any questions, please get in touch with Allan RooneyTim Davis, Steve WilanskySumangali Rudrakumaror Lauri O’Callaghan, or call us at +1 212 545 8022.

 

Read more insights from the Rooney Law team here.

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