On April 23, 2024 the FTC announced its final rule banning non-compete agreements for essentially all employees.
This article: (1) summarizes the Rule’s key provisions; (2) what employers must do to comply with it; and (3) some recommendations for coping with the uncertainties from litigation already challenging the Rule.
Who Is Covered?
The Rule’s definition of a business entity is so broad that it covers essentially all employers with limited exceptions such as banks and not-for-profit entities.
The definitions of employment, work, and worker are similarly so broad that the Rule covers any natural person who provides any services, whether paid or unpaid, for any business entity.
The Rule is applicable regardless of whether the person provides the services as an employee, independent contractor, consultant, intern or in a franchise arrangement.
What Is Banned?
Entering into any non-compete agreement.
Attempting to enforce any such agreement.
Representing to a worker that they are subject to such an agreement.
Extent of Ban?
The definition of a non-compete is so broad that it prohibits any restriction on what new business entity a person can begin working – for after they end working for their current employer.
The prohibition is on any agreement which prohibits, penalizes, or has the functional effect of preventing a worker from beginning to work for any new business entity they choose.
This band effectively means that any person can quit employment with their current employer and immediately begin working for a direct and major competitor.
When Is Band effective?
The ban does not take effect until 120 days after the Rule is officially published in the Federal Register. So it may become effective sometime in September or early October 2024, if it is not blocked by litigation, as discussed below.
What Are Required Actions?
As of August 21, 2024 essentially all business entities must provide a written notice to their employees who have non-compete agreements that they will no longer be enforced.
It appears that business entities must provide the same notice to recently separated former employees who are still subject to a non—compete agreement.
Business entities will be prohibited from entering into any new agreements which contain non– compete clauses.
The only exception is that a non–compete agreement with a senior executive can be enforced provided it was entered-into prior to the ban’s effective date.
Once that agreement terminates, even this senior executive cannot be required to enter-into a successor agreement that includes a non—compete clause.
The definition of who is a senior executive is very limited.
A senior executive is defined as a highly compensated person, earning at least $151,164 a year, who has final authority to make policy decisions on significant aspects of operating a business entity.
What Is Not Banned?
Non- solicitation agreements which prohibit a person from soliciting the employees, clients or customers of their former employer are still enforceable.
Confidentiality and nondisclosure agreements are also still enforceable.
Restrictive covenants are enforceable on owners of a business in a sale of it.
Uncertainties From Litigation
Litigation has already been initiated claiming that the FTC does not have the authority to issue the Rule.
It is quite possible that this litigation will go on for years and may be appealed to the United States Supreme Court.
It is also quite possible that an injunction will be issued prohibiting the FTC from enforcing the Rule until the litigation is completed.
It may be years before employers will actually have to comply with the Rule, and only if it is enforced by the federal courts.
Recommendations
If an injunction against FTC enforcement is issued while this litigation is proceeding, then employers can continue to enter into new non—compete agreements.
Similarly, they can continue to enforce current agreements.
If enforcement of the ban is permanently blocked by the federal courts, then by taking these recommended actions employers protect against any gaps in their use of non-competes to protect their businesses.
If enforcement of the ban is permitted by the courts to proceed, then employers simply have to provide the notices described above that they will not enforce these new and any other non-competes previously entered-into with their employees.