On Tuesday, April 23, 2024, the Federal Trade Commission (“FTC”) issued a rule banning most non-compete clauses in the United States. Lawsuits have already been filed to challenge the rule. However, businesses should prepare for the rule to go into effect 120 days after publication in the Federal Register (“Effective Date”), which is expected soon.
A non-compete clause is 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 with a different person after the employment has ended; or (ii) operating a business after the employment has ended. Non-compete clauses can be part of a written or oral agreement, such as an employment agreement, separation or severance agreement, confidentiality and nondisclosure agreement, or as part of a workplace policy, such as in an employee handbook.
Existing Non-Competes
After the Effective Date, the rule makes existing non-compete clauses for all workers unenforceable except senior executives. “Worker” is defined broadly to include employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. For these now unenforceable non-compete clauses, workers must be given notice before the Effective Date that the non-compete clause will not, and cannot legally be, enforced against the worker. The rule has a model notice and delivery requirements.
For senior executives, existing non-compete clauses as of the Effective Date will remain enforceable. Senior executives are workers in a policy-making position who received at least $151,164 in annualized compensation. This is a very narrow group, estimated by the FTC to be 0.75% of the workforce. Examples of senior executives include presidents, CEOS, and their equivalents, or any other officer who has authority to make policies that control significant aspects of the business.
Non-Competes After the Effective Date
After the Effective Date, it is an unfair method of competition to enter into a non-compete clause with all workers, including senior executives.
Exceptions
The rule does not apply:
- where a cause of action accrued prior to the Effective Date, such as a violation of a non-compete clause occurring prior to the Effective Date, or
- to a bona fide sale of a business, ownership interest in a business, or all or substantially all of the operating assets. A bona fide sale is one made in good faith, between two independent parties at arm’s length, and where a seller has an ability to negotiate the sale terms.
Additionally, non-solicitation and confidentiality covenants are still enforceable; however, overbroad non-solicitation and confidentiality covenants that essentially act as non-competition covenants may be unenforceable under this rule.
It is vital for businesses to begin preparing for this non-compete ban given the uncertainty of court decisions. Please reach out to Gutwein Law to help you in this process.
