Federal Trade Commission Adopts a Final Rule Prohibiting Enforcement of Non-Compete Agreements
Apr 29, 2024
By Michael Billmeier, Partner
On April 23, 2024, the Federal Trade Commission adopted a Final Rule banning employers from imposing non-compete clauses on their employees. The restrictions will be effective 120 days after the Rule’s publication in the Federal Register. The Rule is already the subject of judicial attack in lawsuits filed by the U.S. Chamber of Commerce and others seeking to enjoin and invalidate the Rule’s implementation.
SCOPE OF THE FINAL RULE
The Rule prohibits employers from entering into new non-compete agreements and clauses with workers, as of the Rule’s effective date. The Rule defines a “non-compete clause” as:
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 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
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.
Further, the Rule prohibits enforcement of existing non-compete agreements and clauses against “workers” (see definition below) and bars enforcement of non-compete agreements and clauses against “senior executives,” (see definition below) entered into after the Rule’s effective date. Existing non-compete clauses against senior executives may continue to be enforced.
WHO IS A WORKER FOR PURPOSES OF THE RULE?
“Worker” is defined broadly. The Rule states that a worker or employee is “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, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.”
WHO IS A SENIOR EXECUTIVE FOR PURPOSES OF THE RULE?
The Rule allows enforcement of currently existing non-compete clauses against senior executives. “Senior executive” means a worker or employee who:
(1) was or is in a policy-making position; and
(2) has received total annual compensation of at least $151,164 in the preceding year or any portion thereof.
A “policy-making position” is “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority.” “Policy-making authority” is “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.” It does not include “authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”
With respect to these “senior executives,” the Rule provides it is an unfair method of competition for an employer to:
(1) enter into or seek to enforce or attempt to enforce a non-compete clause entered into after the effective date; or
(2) where the non-compete clause was entered into after the effective date.
EXCEPTIONS TO THE FINAL RULE
While the Final Rule imposes strict limitations on the use of non-compete agreements and clauses, it does allow for the following exceptions under specific circumstances:
A. Franchisee / Franchisor Exception:
The Rule prohibits and bars enforcement of non-compete agreements and clauses between a Franchisee or Franchisor entity and their respective employees. But the Rule DOES NOT prohibit non-compete agreements between a Franchisor entity and its Franchisees. Non-compete agreements between Franchisors and Franchisees will continue to be governed by applicable State or Federal law.
B. Sale of Business Exception:
The Rule DOES NOT prohibit or apply to non-compete agreements or clauses entered into pursuant to, and included in, a contractual arrangement for the sale of a business entity or operation.
C. Non-Disclosure, Non-Solicitation and Confidentiality Agreements:
The Rule DOES NOT address or specifically prohibit employers from entering into Non-Disclosure(NDAs), Non-Solicitation or Confidentiality Agreements or clauses with workers, employees or third parties.
D. Existing Causes of Action:
The Rule DOES NOT apply where a cause of action related to a non-compete clause accrued prior to the Rule’s effective date.
REQUIRED NOTICE TO EMPLOYEES AND WORKERS
The Rule requires that a person or business who has entered into a non-compete clause with a worker must provide and deliver written notice to the worker that any non-compete clause cannot be enforced against the worker. This written notice must be provided by the effective date of the Rule. The notice requirement does not apply to senior executives.
The Rule provides model language for the notice and provides a safe harbor if the model language is used. The Rule allows for provision of the notice in languages other than English. To see a template form of notice in English click here: English Sample Notice and to see a template form of notice en Español, haga clic aquí: Spanish Sample Notice. To download a Word template to customize for your own use, click here for English or here for Spanish. Model notices in other languages are also available here.
Preemption of State Law
The Rule preempts any state laws that conflict with the Rule.
IMPACT ON EMPLOYERS
As noted, the U.S. Chamber of Commerce and others have filed lawsuits challenging the FTC Rule. If the Final Rule is upheld, employers and businesses will need to quickly comply with the provisions of the Rule and the new notice obligations to workers. Employers, in preparation for the potential implementation of the Rule and prohibitions contained therein, should work with their counsel in reviewing any currently existing non-compete agreements. It is important to note that the Final Rule DOES NOT specifically prohibit an employer from using or requiring non-disclosure agreements, non-solicitation agreements or confidentiality agreements from its workers or third parties.
Colodny Fass’ attorneys will continue to closely monitor the litigation challenging the Rule as well as all other developments concerning the Final Rule’s implementation and effect on employers and business entities.
Mike Colodny, Esquire
Corporate Law Division
Email: mcolodny@colodnyfass.com
Phone: 954‑492‑4010
Sandy P. Fay, Esquire
Corporate Law Division
Email: sfay@colodnyfass.com
Phone: 954‑492‑4010
Maria E. Abate, Esquire
Employment Law Division
Email: mabate@colodnyfass.com
Phone: 954‑492‑4010