On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule concerning unfair methods of competition, which prohibits post-employment non-compete clauses for workers in the United States.
FTC’s final rule was published in the Federal Register on May 7, 2024 and is effective 120 days thereafter (September 4, 2024). However, the rule is currently being litigated in several jurisdictions, including a case seeking a preliminary injunction to prevent it from going into effect.
As this deadline approaches, we thought it would be helpful to take a deeper dive into the final rule to understand its requirements and exceptions. When published, the rule will be part 910 of subchapter J under Chapter I in title 16 of the Code of Federal Regulations.
What is an unfair method of competition under FTC’s final rule?
After the effective date, it will be an unfair method of competition: (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that a worker is subject to a non-compete clause.
What is a non-compete clause under FTC’s final rule?
“Non-compete clause” means:
(1) 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.
(2) For the purposes of this definition, a term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
Who is covered by the FTC’s non-compete clause ban?
For workers (who are not senior executives, as discussed below) with existing post-employment non-competes , such agreements will not be enforceable after the final rule’s effective date. Additionally, the person who entered into the non-compete clause with the worker must provide notice to such worker (including former employees who are still subject to a non-compete clause) by the effective date that such non-compete clause will not be, and cannot legally be, enforced against such worker. A “person” is defined as “any natural person, partnership, corporation, association, or other legal entity[, such as a limited liability company,] within the [FTC]’s jurisdiction, including any person acting under color or authority of State law.”
Under the FTC’s final rule, a “worker” is broadly defined 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 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. [Emphasis added.]
The FTC explained that the term “worker” would include any natural person who works, whether paid or unpaid, for an employer, without regard to whether the worker is classified as an “employee” under the Fair Labor Standards Act or any other statute that draws a distinction between “employees” and other types of workers.
Who (and what) is not covered by the FTC’s non-compete clause ban?
The FTC’s final rule does have certain exceptions. The FTC’s non-compete clause ban does not apply to:
(a) workers currently employed by an employer or doing work for a person. After the effective date, the FTC’s non-compete ban prohibits the enforcement of a non-compete after the worker has ended employment or working for the person,
(b) a cause of action related to a non-compete clause accrued prior to the effective date. If a non-compete clause is breached before the final rule’s effective date, it can be enforced even after the effective date,
(c) existing non-competes (non-competes entered into before the final rule effective date) for senior executives (defined below),
(d) a bona fide sale of business. The non-compete clause ban does not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets, or
(e) enforcement or a representation about a non-compete clause where a person has a good faith basis to believe that the FTC’s non-compete clause prohibition is inapplicable.
Who is a “senior executive” under the FTC’s final rule?
“Senior executive” means a worker who:
(1) Was in a policy-making position (defined below); and
(2) Received from a person for the employment total compensation of at least $151,164 in the preceding year (or when annualized if the worker was employed for only part of the preceding year).
“Policy-making position” is defined as:
a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority [(to make policy decisions that control significant aspects of a business entity or common enterprise)], or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this [definition]. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.
What notice must be sent to covered workers?
The notice to workers (including former employees who are still subject to a non-compete clause) must identify the person who entered into the non-compete clause with the worker (e.g. the employer) and clearly state that (i) any non-compete clause will not be enforced against the worker, (ii) the worker may seek or accept a job with any company or person, even if they are a competitor, and (iii) the worker may run a business of their own, even if the business would be a competitor. The FTC has published a form of notice in various languages (available on its website here) to be sent to workers notifying them that the non-compete clause will not be, and cannot legally be, enforced against them.
When must the notice be sent?
The notice must be sent to workers by the effective date, September 4, 2024.
How must the notice be sent?
A paper copy of the notice may be delivered to the worker, by hand or by mail at the worker’s last known personal street address. Alternatively, the notice may be sent electronically to the worker, by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. Best practice would be to keep a record of the notice sent and the means by which it was sent to each worker.
If a person required to provide notice has no record of a street address, email address, or mobile telephone number for a worker, such person is exempt from the notice requirement with respect to such worker. Presumably, if you have no way to contact the worker, you would not be able to enforce a non-compete clause against them.
Does the FTC non-compete clause ban apply to other forms of restrictive employment clauses?
The FTC’s non-compete clause ban does not prohibit other restrictive covenants such as confidentiality or non-disclosure agreements, non-solicitation agreements or agreements for the reimbursement of training; provided that these restrictive covenants are (i) not prohibited by state law and (ii) not so broad as to “function to prevent a worker” from accepting employment elsewhere or operating a business of their own.
How does the FTC’s final rule impact state laws?
The final rule preempts state laws that conflict with it. However, the FTC’s final rule does not limit or affect enforcement of state laws that restrict non-competes that are not in conflict with the final rule. Furthermore, the final rule includes a severability clause so that if a reviewing court were to hold any provision or application of the final rule invalid or unenforceable, the remainder of the final rule remains in effect.
******************************************
In the next few weeks, employers and business entities should review their policies, procedures and agreements for any non-compete clauses and ascertain how many notices will need to be sent out by the FTC’s final rule effective date, September 4, 2024. Additionally, those policies and agreements containing non-compete clauses will need to be revised to ensure compliance with the FTC’s final rule. The FTC’s final rule does not prevent entering into or enforcing non-disclosure agreements or other restrictive covenants.
We will provide updates as matters develop with respect to FTC’s final rule and its pending litigation.
For further information or guidance on revising your policies, procedures, and agreements, please contact David Paseltiner, Robert Londin or Rose Egan.
