On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that includes broad and sweeping bans on non-compete clauses throughout the United States with only very limited exceptions (the “Final Rule”). The FTC has announced the use of non-compete clauses in most circumstances will constitute an unfair and deceptive business practice giving rise to an array of civil penalties the FTC may seek in federal enforcement actions. The rule will go into effect 120 days after publication in the Federal Register. The Final Rule faces legal challenges in Court that may stay or delay its implementation.
Under the Final Rule, a “non-compete clause” is defined broadly including “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 rule separates “workers” into two classifications – “senior executives” and workers that are not senior executives. For workers that are not senior executives, the rule provides that it is an unfair method of competition to enter or attempt to enter, to enforce or attempt to enforce, or to represent that a worker is subject to a non-compete clause. Accordingly, as to anyone other than a senior executive employee, the Final Rule prohibits both existing and prospective non-compete agreements.
The Final Rule also categorically prohibits prospective non-compete agreements for “senior executives.” In other words, it does not apply to non-compete clauses with senior executives entered into prior to the effective date of the Final Rule. As such the employer can continue to represent that a senior executive is subject to such a pre-existing non-compete clause without violating the Final Rule.
The term “senior executive” includes certain specified company officers and others in policymaking positions; accordingly, any determination of whether a person is a senior executive will be fact specific. It is also important to note that the term “worker” is defined broadly to include not only employees, but also other persons performing work for others such as independent contractors and volunteers.
In addition to banning most non-compete clauses, the Final Rule requires that any employer or other person that entered into a now-prohibited non-complete clause with a worker prior to the effective date of the Final Rule must notify such worker by the effective date of the Final Rule that the applicable non-compete clause is not enforceable and will not be enforced against such worker. The Final Rule has specific notice requirements that must be met and includes model language that can be used to comply with this part of the Final Rule.
The limited exceptions to the Final Rule’s prohibitions include: (1) non-competes entered into pursuant to a bona fide sale of a business entity, ownership in a business entity, or all or substantially all of a business entity’s operating assets; (2) causes of action related to a non-compete clause that accrued prior to the effective date of the Final Rule; and (3) instances where a person has a good-faith basis to believe that the Final Rule is not applicable.
As noted above, legal challenges to this Final Rule could impact the effective date and/or implementation and enforcement of the Final Rule. However, employers and any other persons with non-competes in place (or other agreements or practices that would fit under the broad term of “non-compete clause” as defined by the rule) should, in the meantime, review their existing agreements and policies and be prepared to comply with the requirements of the Final Rule once an effective date is set by the publication of the rule in the Federal Register.
For more information or questions about the Final Rule, please feel free to contact Michael S. Lewis at msl@rathlaw.com and Alexandria Russell at arr@rathlaw.com or any other member of the Labor and Employment group here at RYP.
