The Federal Trade Commission (FTC) published its final rule on May 7, 2024, which prohibits all non-compete agreements, with limited exceptions, for all employees. The rule is set to go into effect on September 4, 2024, 120 days after publication in the Federal Register. Should the rule be deemed ‘significant’ based on its potential economic impact or policy implications, the final rule will undergo a presidential-level review prior to being published in the Federal Register, and Congress and the Government Accountability Office will be provided the opportunity to review it prior to the rule taking effect. However, if the House and Senate pass a resolution for disapproval of the rule, and the president signs it, or if both houses override a presidential veto, the rule is void and cannot be reinstated in the same form without Congressional approval.
The FTCs goal with this sweeping national ban is to promote and foster new business formation and innovation while protecting workers’ fundamental freedom to freely change jobs. The FTC projects an increase of 2.7% of new firm formation equating to 8,500 new businesses per year and an increase of $524 in earnings to the typical worker per year.
Non-compete clauses are defined under the final rule § 910.1 as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Under the final rule, the FTC views non-compete agreements as a method of unfair competition under the law. Prohibiting entering, enforcing, or representing that any non-senior executive worker is subject to a non-compete provision. Workers include employees and independent contractors.
A Senior Executive, not subject to a non-compete ban, under the rule, are workers in a policy-making position that earns an actual or annualized sum of $151,164, including salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the preceding 52-week period prior to the worker’s departure. Policy-making positions include the roles of a president, chief executive officer, any other officer or similarly situated person who has policy-making authority for the business entity. Officer includes the SECs definition, including a president, vice president, secretary, treasurer or principal financial officer, comptroller, or principal accounting officer, and any natural person who performs such functions for the business. Policy-making authority is one with the final authority within the business entity to control significant aspects of the entity and to make policy decisions.
Exempt Companies not subject to the FTC rule include banks, credit unions, savings and loan institutions, some non-profits, and air carriers.
Challenges of the Finale Rule. Ryan, LLC filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the final rule. They seek to vacate and set aside the final rule citing that the FTC does not have the authority to issue the rule and that the rule itself is unconstitutional. The U.S. Chamber of Commerce filed its federal lawsuit in the U.S. District Court for the Eastern District of Texas, Typer Division, on April 24, 2024, seeking injunctive relief from enforcement of the final rule. The injunction would halt the enforcement of the rule and extend the effective date of enforcement.
What You Need to Know
- All restrictive covenants should be drafted narrowly to protect a legitimate business interest, such as trade secrets, confidential information, or customer goodwill. Restrictions should not be broader than necessary to protect the legitimate business interest, being reasonable in terms of duration, geography, and scope of prohibited activities. The agreement should be drafted to easily sever a provision if challenged in court and found unlawful while keeping the other restrictions intact. Finally, lower-level workers, absent legitimate reasons, should not require a restrictive covenant.
- Identify and prepare notices for workers bound by an existing non-compete regarding the unenforceability of the non-compete clause to be effective September 4, 2024.
- Senior Executive non-compete agreements may remain in force. However, the entity should identify those individuals who qualify as Senior Executives with policy-making roles and compensation levels.
- Employers are allowed to restrict actively employed employees from competing activity.
- The FTC Rule supersedes all state laws, regulations, orders, and interpretations of non-competes that are inconsistent with the final rule. However, state laws with stricter limitations are allowed.
- The final rule does not negate current litigation concerning a non-compete agreement.
- Alternatives to non-compete clauses business entities can utilize to protect their confidential information include confidentiality agreements, non-disclosure provisions, and non-solicitation provisions. These provisions need to be narrowly tailored to defeat the final rules’ fact-specific inquiry into contractual provisions.
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