By: Tara Sohlman
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to approve its Final Non-Compete Clause Rule, 16 CFR Part 910, which bans post-employment non-compete agreements between employers and employees. This rule will affect virtually every industry.
The rule has not yet gone into effect. The FTC set the effective date as 120 days after the rule’s publication in the Federal Register; but, there have been legal challenges filed already to block the rule. There are legal questions as to whether the FTC has the authority to undertake this ban via rulemaking or whether such a ban should require legislation. Only some U.S. states have banned non-compete agreements completely. Other states have placed restrictions on non-competes but still allow them.
A. Summary of the Rule
Under the rule, non-compete clauses have been declared an unfair method of competition and a violation of Section 5 of the Federal Trade Commission Act. 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: (i) seeking or accepting work in the United States . . . where such work would begin after the conclusion of employment . . .; or (ii) operating a business in the United States at the conclusion of the employment . . .” 16 CFR § 910.1. Employment will mean work for a person, and person means “any natural person, partnership, corporation, association, or other legal entity.” Id.
The rule’s impact will be far-reaching. It will extend to employees and independent contractors. The non-compete definition will encompass any oral or written term or condition of employment that functions to block a worker from seeking or accepting work or operating a business in the United States after the cessation of work for the company. For example, the rule could extend to non-solicitation agreements if they are interpreted as preventing an employee from performing services following termination of employment.
Despite its breadth, the FTC’s rule still allows non-competes during a person’s period of work for a company; the rule only extends to non-competes that impact the worker’s ability to compete after employment ends. Further, alternatives to non-competes, such as non-disclosure agreements, are permitted.
Non-competes entered on or after the rule’s effective date will be banned. With respect to non-competes entered into prior to the effective date, only pre-existing non-competes for senior executives can remain in force; companies cannot enter into future non-compete agreements with top officials. Pre-existing non-competes with other workers will not be enforceable on or after the effective date.
Very few employees will qualify as senior executives. They are defined as workers earning more than $151,164 and who are in a policy-making position. Policy-making means a president, CEO, or equivalent position. The policymaker needs to have policy-making authority to make decisions that impact or control a significant aspect of a business. They represent less than 0.75% of current workers.
The rule does contain exceptions. For example, the rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. It also will not apply to bar a cause of action relating to a non-compete that accrued prior to the rule’s effective date.
More information on the rule and its full text can be found here:
https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
https://www.ftc.gov/legal-library/browse/rules/noncompete-rule
B. When Will the Rule Become Effective?
The rule is scheduled to go into effect 120 days after its publication in the Federal Register, which occurred on May 7, 2024. Thus, the rule is set to take effect on September 4, 2024. However, a court could block the rule from going into effect before then, and legal challenges already have been filed.
The United States Chamber of Commerce, leading a coalition, filed a lawsuit against the FTC on April 24, 2024, in the Eastern District of Texas, to challenge the rule and block its enforcement. In its lawsuit, it seeks to have the rule set aside and a permanent injunction entered against the FTC preventing it from enforcing the rule. A copy of its complaint can be found here: https://www.uschamber.com/assets/documents/Complaint-Chamber-v.-FTC-E.D.-Tex.pdf The Chamber also filed a motion asking the court to stay the effective date of the rule and to issue a preliminary injunction enjoining the rule’s enforcement.
C. Employer-Required Notice by the Effective Date
The new rule will require businesses to provide notice by the effective date to workers, other than senior executives, who are bound by a non-compete. The notice must state that the employer will not be enforcing any non-competes against them. Existing non-compete agreements do not have to be formally rescinded. This notice requirement will apply to any current or former employees or independent contractors bound by a non-compete with the business. See Section 910.2.
Pursuant to Section 910.2(b)(2) of the new rule, the notice must identify the person who entered into the non-compete with the business. The notice must be on paper and delivered to the worker by hand, by mail at the employee’s last known address, or by email to an email address belonging to the worker, which can include the worker’s current work email or be the last known personal email address, or by text message to the worker’s cell. If the employee does not have a last known address, email, or cell number, then notice is not required.
The proposed language from the rule for the notice states:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [date chosen by employer but no later than the effective date of the final rule], [employer name] will not enforce any non-compete clause against you. This means that, as of [date chosen but no later than effective date of the final rule]:
The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule visit:
https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
Section 910.2(b)(4).
An employer presumptively complies with the rule’s notice requirement by providing notice as set forth in Section 910.2(b)(4). The notice only has to be provided in English and does not have to be translated into other languages, although an employer can provide the notice in another language. The FTC provides translations of the above proposed notice that employers may use.