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Date: May 3, 2024

The Federal Trade Commission Bans Noncompete Agreements: What Employers Need to Know

by Foley Mansfield
Date: May 3, 2024
by Foley Mansfield

The Federal Trade Commission Bans Noncompete Agreements: What Employers Need to Know

UPDATE (5/7/24): The final rule has been published in the Federal Register and is effective as of September 4, 2024.

You may have seen the headlines announcing that the Federal Trade Commission (FTC) is banning noncompete clauses, but what actually happened, and what does it mean for your business?

On Tuesday, April 23, 2024, the FTC voted to issue the Noncompete Clause Rule (the “final rule” or the “rule”), which will ban most noncompete clauses nationwide. The final rule is set to become effective 120 days after it is published in the Federal Register, giving you time to evaluate whether the rule will apply to your business and to prepare to comply with the rule before it takes effect.

What Did the FTC Ban?  

When it goes into effect, the final rule will ban entering or attempting to enter noncompete clauses with workers, representing that a worker is subject to a noncompete clause, and enforcing or attempting to enforce most noncompete clauses. The final rule applies to workers (rather than “employees”) and defines a “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal laws.” This broad definition means the rule applies not only to employees, but also to independent contractors, interns, and volunteers.

The final rule broadly defines a “noncompete clause” 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 final rule not only applies to written contracts, but also to oral agreements and written or oral workplace policies. So, if you have a written or oral term or workplace policy that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work that begins after their present work with your company ends, it likely is a noncompete clause that will be banned by the final rule. And because the restriction includes terms or policies that function to prevent a worker from obtaining other work, other restrictions—such as non-solicitation or non-disclosure agreements—may also violate the rule if written so broadly that they effectively operate as noncompete clauses.

What Falls Outside the Ban?

The final rule contains several important exceptions:

  • Senior Executives: If a worker qualifies as a senior executive under the rule, you can still enforce a noncompete clause with that worker if it was entered into before the effective date of the final rule The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. The requirement that a worker be in a policy-making position is written narrowly, so be sure to consult with employment counsel on whether this exception applies.
  • Sale of a Business: Noncompete clauses can still be part of a bona fide sale of a business or of a person’s ownership interest in a business.
  • Franchisee-Franchisor: If you are a franchisor, you can still enter a noncompete clause with the franchisee as part of the franchisee-franchisor relationship. But this exception is limited to that relationship—it does not apply to individuals who work for either a franchisee or franchisor.
  • Concurrent Employment: The final rule only applies to a worker seeking or accepting work that would begin after the current work ends, meaning the rule does not affect otherwise valid restrictions on working for another company at the same time a worker is working for your business—but make sure such a restriction does not prohibit, penalize, or prevent a current worker from seeking new work or starting a business that would begin after their work for you ends.
  • Existing Cause of Action: The final rule does not apply if a cause of action related to a noncompete clause accrues prior to the effective date of the rule. If one of your workers has already violated their noncompete, you should consult with employment counsel because you may have legal options available to you.

Does the Ban Apply to My Business?

While the final rule applies nationwide, the FTC’s regulatory authority is restricted in a number of ways that will limit the scope of the final rule. The FTC is “empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce,” but that power does not extend to certain banks, savings and loan institutions, federal credit unions, common carriers, or to persons, partnerships, or corporations that are subject to the Packers and Stockyards Act. Also, the FTC’s defines a “corporation” as an entity that is “organized to carry on business for its own profit or that of its members.” But as the FTC explained when announcing the rule, courts have held that whether an entity is organized for profit is a multi-factor inquiry that looks at more than just whether the entity claims or qualifies for non-profit status under the Internal Revenue Code. While the final rule might not apply to your business if it is organized as a non-profit, you should consult with employment counsel before deciding whether you are required to comply with the rule.

What Else Does the Final Rule Require?

In addition to banning most noncompete clauses, the final rule also requires employers to give notice to workers by the effective date of the rule, “that the worker’s noncompete clause will not be, and cannot legally be, enforced against the worker.” The final rule incorporates model language that can be used to provide the required notice, and use of the model language constitutes the notice required by the rule.

The notice must be delivered to the worker either by hand, by mail to the worker’s last known personal address, by email to an email that belongs to the worker (including the worker’s current work email or last known personal email), or by text message to a cell number that belongs to the worker.

What if My State Already Bans Noncompetes?

If your state is one of several that already bans or severely restricts noncompete clauses, such as California or Minnesota, the final rule does not affect your obligation to comply with state or local laws that are more restrictive than the final rule. For example, while Minnesota’s ban does not apply retroactively, the final rule does apply retroactively to ban most existing noncompete agreements. But the final rule will supersede state and local laws that otherwise would permit or authorize conduct that is prohibited by the rule. In short, everyone who falls under the FTC’s jurisdiction will have to comply with the final rule regardless of what their state may allow, but if aspects of your state or local laws are more restrictive than the final rule, the final rule will not exempt you from also having to comply with those state and local laws. So even if you are already complying with state or local restrictions on noncompete clauses, you still need to make sure you are ready comply with the final rule as well.

When Is the Final Rule Effective, and What Should I Do to Prepare?

The final rule is set to become effective 120 days after it is published in the Federal Register. However, the rule will certainly be challenged in court, and the courts hearing those challenges may stop the final rule from going into effect while courts evaluate those challenges. If the final rule is not blocked by the courts, or the final rule is ultimately upheld, your business will need to be prepared to comply.

Given the nature of litigation challenging new agency regulations, we may not know whether the final rule will go into effect as scheduled until right before the effective date. Now is a good time to review any existing agreements or policies you have that contain noncompete clauses. You should also review other provisions that could fall within the scope of the final rule, such as non-solicitation or non-disclosure provisions that may have the practical effect of preventing a worker from obtaining a new job or starting a business if drafted too broadly. If your business currently relies on noncompete agreements to protect itself, now is a great time to consult with employment counsel on crafting and implementing policies that will protect your trade secrets and confidential information without the use of on noncompete clauses.

Determining whether the final rule will apply to your business, what steps you need to take to comply with the final rule, and how you can protect your trade secrets and confidential information can be challenging. If you are an employer with questions on the FTC’s ban on noncompete clauses or have other employment concerns, please feel free to consult our firm to determine the best approach for your business.

 

Contacts:

Paul Magyar

Tessa Mansfield Hirte

 

Related Practices:

Employment Law Litigation

Business & Corporate

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