On April 23, 2024, the Federal Trade Commission (“FTC”) issued a new rule banning nationwide most non-compete agreements for workers. Although court challenges are anticipated that could delay or preclude enforcement of this new rule, it is currently set to become effective 120 days after publication in the Federal Register.
The new 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 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 further provides that, for its purposes, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
At its core, the new rule provides that it is an unfair method of competition – and therefore a violation of Section 5 of the FTC Act – for employers to enter into a non-compete clause, to enforce (or attempt to enforce) such a clause, or to represent that a worker is subject to non-compete prohibitions on or after the rule’s effective date.
The FTC adopted a slightly different approach with respect to “senior executives.” Under the rule, “senior executives” are defined as individuals in a policy-making position with a total annual compensation of at least $151,164 in the preceding year (inclusive of salary, commissions, and other nondiscretionary compensation, such as bonuses). With respect to existing non-competes with senior executives (i.e., non-competes entered into before the rule’s effective date), existing non-competes can remain in force; the final rule does not cover such agreements. However, employers cannot enter into new agreements with senior executives, and, similar to other workers, cannot attempt to enforce or represent that a senior executive is subject to a non-compete clause, after the effective date.
To be compliant with the new rule, employers must provide workers with written notice that their existing non-compete clauses are no longer enforceable. The FTC has provided model language for the written notice requirement.
Importantly, the new rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. The rule also does not apply to non-competes entered into pursuant to a bona fide sale of a business entity. Finally, reasonable non-solicitation agreements will remain enforceable.
As noted above, the new rule will become effective 120 days after the FTC publishes it in the Federal Register. Covered employers have until the effective date to come into compliance with the rule. There is a strong likelihood that the ultimate enforceability of the rule will be challenged in district courts, which itself could result in a temporary restraining order or preliminary injunction delaying the rule’s effectiveness. Notwithstanding, employers should begin to compile lists of existing non-compete agreements in anticipation that the rule in its current form is upheld.
If you have any questions regarding this article, please contact the Underberg & Kessler attorney who regularly handles your legal matters, or Ryan T. Biesenbach at (585) 258-2865 or rbiesenbach@underbergkessler.com.