On April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (the “Final Rule”), which bans almost all post-employment non-compete clauses between employers and their workers.
The Final Rule becomes effective 120 days after being published in the Federal Register. As of yet, it has not been published. Enforcement of the rule could be delayed – or barred completely – by legal challenges in two lawsuits challenging the Final Rule and the FTC’s power to enact it.
What You Need to Know:
The Final Rule threatens to unwind certain protections employers have traditionally used to ensure business viability by prohibiting employers from entering into, or attempting to enter into, a non-compete with a “worker” or from representing to a third-party that a worker is subject to a non-compete. The Final Rule is retroactive in its application.
Under the Final Rule, a worker includes both employees and independent contractors. Although the Final Rule allows employers to maintain existing non-compete agreements with “senior executives” (employees who have an annual compensation over $151,164 and who make policy decisions for the business), employers are barred from entering into such agreements 120-days after the Final Rule is published. The Final Rule was published on May 7, 2024 meaning employers have until September 4, 2024 to bring their employment agreements into compliance. The Final Rule does not prohibit non-compete agreements entered into by a person pursuant to a bona-fide sale of a business. It also does not apply to litigation filed prior to the Final Rule’s effective date.
Once effective, the Final Rule imposes an obligation to provide a clear and conspicuous individualized notice to a worker subject to a prohibited non-compete, that the worker’s non-compete clause will not and cannot legally be enforced against that worker. The employer must provide this notice, once the Final Rule becomes effective, by hand-delivery, by mail to the worker’s last known address, by email, or by text message.
In addition to banning almost all non-competes, the Final Rule also places restrictions on non-disclosure and non-solicitation agreements where the functional effects of such agreements are equivalent to a non-compete.
The Final Rule provides that a non-disclosure clause operates as a non-compete, for example, “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.”
Similarly, non-solicitation agreements can satisfy the definition of a non-compete clause, “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”
Violations of the Final Rule are punishable by fines, penalties, and injunctions, but the Final Rule does not provide employees with a private right of action.
Of course, this leaves employers in a quandary with respect to protecting its business. Once published, and if there are no successful legal challenges, employers must be creative to ensure key employees and customers are not lost to competitors. Tools such as innovative compensation schemes or enhanced trade secret protections will be necessary moving forward.
