As many outlets have reported in the passing weeks, on April 23rd, the Federal Trade Commission (FTC) voted to issue a final rule banning non-compete clauses nationwide with limited exceptions. This rule represents a massive sea change for many employers nationwide, but some have questioned its enforceability. So, what does this mean for employers? And what can employers do to prepare?
The Highlights of the Final Rule:
- Persons are prohibited from enforcing or entering into any non-compete with workers (other than senior executives) on or after the effective date;
- Persons may enforce existing non-compete agreements with senior executives but are prohibited from enforcing any new non-competes with senior executives after the effective date;
- The final rule includes an exception that allows a non-compete between the seller and buyer of a business;
- By the effective date, persons must notify affected workers that their non-compete is no longer in effect and will not be enforced.
Below are answers to common questions to ensure employers remain compliant with the Final Rule.
When Does The Final Rule Go Into Effect?
The final rule takes effect 120 days from the date it is published in the Federal Register (the "effective date"). So, if nothing else changes, the final rule will likely be in effect mid-to-late August 2024. However, as of early May, two lawsuits have been filed challenging the enforceability of the FTC rule: one by the U.S. Chamber of Commerce and another by a large tax services firm.
Both lawsuits allege that the FTC does not have authority to issue this rule and the rule itself is unconstitutional. These two cases are still in their infancy, but have the potential to postpone enforcement of the rule, or undo it altogether. Employers should keep tabs on this as it will continue to develop over the coming months.
What Is a Non-Compete Under the FTC Rule?
Under the final rule, non-compete means a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work or operating a business in the United States with a different person after the conclusion of their employment.
While it remains to be confirmed, given this broad definition, this rule likely eliminates not only explicit non-competition agreements but also non-solicitation and overbroad confidentiality agreements.
Which Persons Are Covered By The Final Rule?
The final rule does not use the term "employer," the final rule instead covers any "person" which means "any natural person, partnership, corporation, association, or other legal entity within the [FTC's] jurisdiction, including any person acting under color or authority of State law." The FTC's jurisdiction is very broad but does not include non-profit entities and some financial institutions. So, nearly all for-profit employers are covered by the final rule.
Who is a Worker?
A "worker" is defined broadly under the final rule. Most importantly, it covers all employees, unpaid volunteers, and independent contractors. This is a significant departure from current state law bans on non-competes which arguably did not apply to independent contractors.
Who Is A Senior Executive?
A "senior executive" means a worker who:
- was in a policy-making position; and
- earned at least or had annualized earnings of $151,164 in the preceding year.
The senior executive's total annual compensation includes salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during that 52-week period. Total annual compensation does not include board, lodging and other benefits payments. We expect more guidance on what a "policy-making position" is in the coming weeks.
Does The Final Rule Apply To Persons Selling A Business Entity?
No. The final rule's requirements shall not apply to a non-compete entered into by a person pursuant to a bona fide sale of a business entity. Importantly, the final rule does not define what a sale is in great detail. However, California law uses similar language, so we anticipate a similar standard will apply nationwide—this will likely be a source of future litigation.
What Are The Notice Requirements?
Before the effective date, employers with unenforceable non-competes must provide clear and conspicuous notice that the worker's non-compete will not be, and cannot legally be, enforced.
What Should You Do Now?
The FTC noted that " all employers would need to do to comply with the rule is to stop enforcing existing non-competes with workers other than senior executives, provide notice to such workers, and stop entering into non-competes with all workers going forward." This is an oversimplification, and employers should not only ensure compliance but also look to their confidentiality and trade secret agreements.
If the final rule becomes effective, these agreements will be employers' first line of defense to make sure their proprietary information remains protected. Additionally, if they don't already exist, employers should consider entering into non-compete agreements with senior executives before the ban goes into effect.
Jared W. Speier is a partner in the Employment Law practice group at Stradling Yocca Carlson & Rauth in Los Angeles.
