As we have previously communicated, on April 23, 2024, the Federal Trade Commission (“FTC”) issued a Final Rule that bans virtually all non-compete clauses between workers[1] and employers. This rule was issued as a result of the FTC finding that non-competes are a method of unfair competition and, therefore, are a violation of Section 5 of the FTC Act.
Although multiple legal challenges to the enforceability of the Final Rule have been filed in various jurisdictions throughout the country, the ban is currently set to take effect on September 4, 2024 (“Effective Date”). We continue to monitor all legal developments that may impact the Effective Date, but unless it is prohibited by a judicial order before early September, the Final Rule will become effective and will have a significant impact on millions of businesses across the country.
As currently issued, the Final Rule will render all preexisting non-compete clauses unenforceable against workers as of the Effective Date, except for those involving senior executives.[2] In addition to banning current non-compete clauses, the rule will also render any subsequent non-compete clauses made after the Effective Date unenforceable and a violation of Section 5 of the FTC Act, including those with senior executives.
The Final Rule, however, does not apply to non-competes in the context of bona fide “sale of business” agreements or to other forms of restrictive covenants (e.g., confidentiality, nondisclosure, and non-solicitation provisions). These restrictive clauses, if included in an existing agreement, remain valid and enforceable, so long as a legal severability clause is included in the agreement.
In order to comply with the new FTC Rule, prior to the Effective Date, employers are required to provide written notice to each worker who is subject to a non-compete clause in violation of the FTC Rule, so long as the employer has either a mailing address, email address, or cell phone number for the affected worker. The written notice must: (i) identify the person who entered into the non-compete clause with the worker; (ii) be provided via mail, email or text message to the worker; and (iii) notify the worker that the non-compete clause will no longer be enforced.
In addition, it is likely that both existing and new restrictive covenants agreements will need to be modified or restructured to ensure compliance with the new FTC Rule. Such restrictive covenants agreements are typically intended to protect a number of your business’ intellectual property assets, including confidential information and trade secrets, and prohibit the solicitation of your customers, clients and employees.
As is the case with many new laws and regulations, a careful analysis and interpretation is critical to ensure compliance, as well as a business’ continued right to protect its investment and its viability. We encourage you to contact us to discuss how the FTC Rule impacts your business, your existing restrictive covenants, and your obligation to notify your employees of the pending non-enforceability of non-competes.
Should any of the pending legal challenges to the enforceability of the FTC Rule be successful, our firm will immediately send another Client Alert notifying you of how that ruling impacts your business.
[1] “Worker” is defined to include employees, interns, externs, independent contractors, volunteers, apprentices and sole proprietors, whether paid or unpaid.
[2] “Senior executives” are defined as employees earning more than $151,164 who are in a “policy-making position.” The rule defines “policy-making position” as a business entity’s president, chief executive officer or the equivalent and any other officer of a business entity who makes policy decisions that control significant aspects of the business entity or a common enterprise.
