Non-Compete Agreements to be Banned
The Biden administration issued an executive order in 2021 directing the Federal Trade Commission (FTC) to curtail non-competes in some fashion. The administration’s belief is that non-compete agreements stifle competition and depress wages for U.S. workers. Banning non-compete agreements is intended to encourage competition, innovation, and increased wages. Taking heed of that direction, on April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (Final Rule) which bans post-employment non-compete clauses between employers and their workers. The ban becomes effective on September 4, 2024. According to the FTC, the ban will impact one in every five U.S. workers.
What is a Non-Compete Clause?
A “non-compete clause” 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 (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.” The Final Rule prohibits an employer from entering into, or even attempting to enter into, a non-compete clause with a person defined as a “worker.” For purposes of the ban, a “worker” includes not just employees, but also independent contractors.
Exceptions to The Final Rule
The Final Rule is not just prospective, but also invalidates all existing non-compete agreements with all workers other than “senior executives.” A senior executive is a worker who has more than $151,164 in annual compensation and is in a policy making position for the employer. The Final Rule also does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity or to any non-profit, banking or savings and loan organization.
How Does the Final Rule Impact My Business?
By the date the ban becomes effective, employers must have sent clear and conspicuous notice to all workers, current and former, who were previously subject to non-compete clauses, letting them know that the non-compete is invalid and cannot be legally enforced. This notice must be hand-delivered, mailed to the worker’s last known address, or sent by email or text.
The Final Rule does not explicitly ban non-disclosure agreements, customer non-solicitation agreements, or employee non-solicit agreements. However, it makes clear that it bans any restrictive covenant, regardless of what it is called, if it has the same effect as a non-compete clauses. For example, the Final Rule provides that non-disclosure clauses operate as non-compete clauses for purposes of the ban “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” If a restrictive clause is so broadly written that, for practical purposes, it prevents a worker from working for another employer in the same field, starting their own business, or seeking or accepting other work, the restrictive clause, whatever its title, will be considered a non-compete agreement and will be unenforceable.
The Final Rule will supersede all state laws to the extent that a state’s laws permit or authorize conduct prohibited under the Final Rule or conflict with the Final Rule’s notice requirements.
As would be expected, there are several lawsuits pending that challenge the validity of the ban. All of the lawsuits seek in interim stay of the Final Rule, asking that it not become effective until the challenges are fully litigated. The challenges being made to the Final Rule are largely focused on the lack of statutory authority for the FTC to enact a sweeping rule that affects millions of agreements nationwide.
How Should My Business Prepare?
In the meantime, employers should prepare to send notices to impacted current and former workers should the rule become effective on September 4, 2024, and determine whether any of the impacted employees qualify for the “senior executive” exception. It is also permissible to ask any “senior executives” who are not yet subject to a non-compete to sign one before the effective date of the ban. From there, and assuming the ban takes effect, employers should remove all non-competes from their employment agreements and employment policies and take a careful look at their non-solicitation and non-disclosure agreements to make sure they are not so broad and restrictive as to also qualify as non-compete agreements under the Final Rule.
If you have any questions about how the FTC rule will impact your business, our employment lawyers are here to help. Book a consultation with us today!
The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.