The Federal Trade Commission (“FTC”) issued its final rule Tuesday banning almost all non-compete agreements between businesses and workers nationwide. The FTC reasons that banning non-compete agreements will promote job growth and innovation as workers are given more freedom to choose jobs and start businesses.
The final rule defines a non-compete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Under the final rule, existing non-compete agreements will not be enforceable against most workers including full-time and part-time employees, independent contractors, volunteers, interns, and other similarly situated. Moreover, employers will be required to provide notice to those workers who are currently subject to non-competes that the agreements will not be enforced. The FTC has provided model notices in several languages to help employers comply with the notice requirement.
Potential Exceptions
There are a few narrow exceptions to the FTC’s rule. First, with respect to senior executives, existing non-compete agreements will remain enforceable. The final rule defines a “senior executive” as a worker in a policy-making position who earns at least $151,164 in total annual compensation. However, employers will be prohibited from entering into new non-compete agreements with senior executives once the existing agreements expire. The final rule also will not apply to non-compete agreements entered into by an individual in connection with the bona fide sale of a business entity, or in instances where a cause of action related to a non-compete accrued prior to the effective date of the final rule. Further, the rule does not apply to all employers, as there are certain employers in the banking, nonprofit, and transportation industries that fall outside the authority of the FTC. Finally, the rule does not address non-solicitation or non-disclosure agreements; however, employers should be aware that some restrictive covenants could be deemed to violate the rule if they have the practical effect of a non-compete in limiting worker mobility following employment.
What’s Next?
The final rule is scheduled to take effect in late August or early September, though litigation challenging the rule in the interim is expected. Certain trade organizations already have indicated that they will immediately challenge the final rule as going beyond the FTC’s authority. The United States Chamber of Commerce and other business groups already have filed such a lawsuit in a Texas federal court. It is expected that such challenges may make it all the way to the Supreme Court, which may be a receptive audience to objections to potential administrative overreach.
In the meantime, employers should carefully review and consult with counsel regarding their existing restrictive covenant agreements to assess compliance issues should the new FTC rule actually come into effect. We will continue to monitor these developments and are available to assist employers in navigating the most current requirements.
