Yesterday, the Federal Trade Commission (FTC) issued a final rule intended to ban the use and enforcement of most non-compete clauses signed by workers.
The new rule is not in effect yet. It will become effective 120 days after publication in the Federal Register unless it is enjoined by a court based on a challenge to the rule.
Pursuant to the rule, as of its effective date, all existing non-competes with workers who are not senior executives will no longer be enforceable. Existing non-competes with senior executives can remain in effect and be enforced. However, after the effective date, employers will be prohibited from entering into any non-competes with workers—whether or not they are senior executives. Once the rule takes effect, employers must notify any workers with non-compete clauses that the non-competes are unenforceable.
For franchisors, it is important to note that the rule permits a franchisor to require franchisees to enter into non-competes. Those agreements will remain in effect, and franchisors can still require franchisees to enter into those agreements as a condition of granting a franchise. However, the rule expressly prohibits workers of franchisees or franchisors from being required to enter into non-competes or having their non-competes enforced against them. Therefore, after the effective date of the rule, all non-competes entered into by employees of franchisees will be unenforceable, and franchisors will no longer be allowed to require franchisees to obtain non-compete agreements from employees, including those who have access to the franchisor’s operations manual and other confidential information. Franchisors can still require franchisees to obtain confidentiality and non-disclosure agreements from employees to protect against the disclosure or use of that confidential information.
In addition, the rule would still allow non-competes entered into as part of a bona fide sale of a business entity.
The 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 [employer] 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.”
As a result of the “after the conclusion of” phrase in this definition, employers can still prohibit employees from competing while they are employed. But the rule seeks to eliminate post-employment restraints on competition, including restraints that would otherwise apply when an employee voluntarily quits to take a job with a competitor.
The term “worker” is not limited to just W-2 employees. In addition to employees, the definition of “worker” includes independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services.
Under the rule, a “senior executive” is a worker who is in a policy-making position and receives at least $151,164 in total annual compensation. As stated above, existing non-competes with senior executives can still be enforced, but after the rule is effective, employers will be prohibited from requiring new non-compete agreements from senior executives or any other worker.
Federal rules—especially those that seek to make major changes in policy—are often challenged in court and those challenges, even if not successful, often lead to injunctions that prohibit the implementation or enforcement of the rule while the legal challenges are pending. It is possible that this rule will be challenged, and that a court will prohibit the rule from going into effect while those challenges wend their way through the legal system.
Therefore, employers are advised not to take any immediate action in response to the rule. UB Greensfelder attorneys are reviewing the rule and preparing guidance for those who may be affected.
For more information regarding the FTC’s reasoning for the rule, the FTC’s announcement can be accessed through this link.
