New FTC Rule to Ban Non-Competes – How Does the New Rule Impact You or Your Business?

May 14, 2024

On April 23,2024, the Federal Trade Commission (‘‘Commission’’ or “FTC”) issued its final rule banning non-compete/non-competition clauses and agreements for all workers in the United States, subject to very limited exceptions.  Pursuant to the FTC’s Non- Compete Clause Rule, 16 CFR Part 910, that will take effect on September 4, 2024, it is an unfair method of competition for persons to, among other things, enter into non-compete/noncompete clauses or agreements with workers, subject to limited and narrow exceptions.

Unless one of the many pending legal challenges delay or bar enforcement of the new final rule, the new rule will go into effect on September 4, 2024 and as a result, businesses will have to be in compliance with the new rule by such date.   If not successfully challenged by that time, the final rule requires all employers to provide notice to workers by such time that existing non-competes are no longer enforceable; however, existing non-competes with senior executives will remain enforceable.   For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.

A noncompete clause is a term or condition, often in an employment contract or independent contractor agreement, that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment.

The final rule defines ‘‘worker’’ as ‘‘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 definition further states that 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.

“Senior executives,” which are estimated to make up less than 1% of workers, are also exempt from the rule.  A senior executive is defined by the rule as a worker that earns more than $151,164 in compensation per year and is in a “policy-making position.” Compensation can include salary, commissions, performance bonuses and any other compensation  that the worker can expect, but does not include items like benefits. Policy-making positions include officers, such as the president, CEO, COO, or someone else with authority to make policy decisions for the company.

The rule does not apply to non-competes between businesses, agreements arising from the bona fide sale of a business or interest in a company.  Non-disclosure and non-solicitation agreements are not categorically banned by the new rule, but the FTC has indicated that such restrictive covenants could be prohibited by the new rule if they are so broad and onerous that they have the same functional effect as a non-compete clause that prohibits or penalizes a worker from seeking other employment or starting a new business.

In addition, the final rule does not apply where a cause of action or legal claim related to a non-compete accrued prior to the effective date.  The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable.  The new rule will preempt conflicting state laws, but it will not limit or nor impact state laws that restrict non-competes so long as it does not conflict with the FTC rule.

Ultimately, due to the potential nationwide ban on non-compete agreements imposed by the FTC’s new rule, businesses and individuals are now left with many unanswered questions and concerns on how the ban on non-competes will impact their business, livelihood, and/or pending claims or litigation.   Although the FTC has issued various publications and articles to provide guidance, including a Compliance Guide for Businesses and Small Entities, Compliance Webinar held on May 14, 2024, and FTC Fact Sheet, businesses and workers should seek the guidance and opinion of skilled and experienced legal counsel on the new rule.  Businesses should be diligent and proactive in understanding compliance with the FTC final rule prior to its effective date, assess their business interests and needs, evaluate existing non-compete and employment agreements, determine and issue appropriate notice to workers with non-competes , and consider preparing new agreements that do not violate the FTC rule, if possible.

If you need assistance with understanding the new FTC rule, the AV-rated attorneys at Chane Socarras, PLLC regularly handle business law matters and litigation, including those involving employment agreements, non-completes, non-solicitation agreements, NDA’s or non-disclosure agreements, trade secrets, and other labor and employment law matters. For more information, click here to contact the business litigation firm of Chane Socarras, PLLC or call us at (561) 309-3190.

*This information is for general guidance only and is dated May 14, 2024.   This article will not be updated regularly to reflect any changes related to the FTC’s new final rule, and as the status of the law continues to evolve, please seek legal counsel and rely on the FTC and its publications for any updates.*

 

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