On April 23, 2024, the Federal Trade Commission (FTC) unveiled its Final Non-Compete Clause Rule (“Final Rule”), which bans post-employment non-compete clauses between employers and their workers. This blog aims to provide a comprehensive overview of the key provisions, implications, and frequently asked questions about the FTC’s non-compete ban to keep you informed and compliant.

Overview of the FTC Non-Compete Rule

Scope of the Ban:

• The Final Rule prohibits employers from entering into, or attempting to enter into, non-compete clauses with any “worker,” including employees and independent contractors.
• Employers may maintain existing non-compete agreements with “senior executives” who earn over $151,164 annually and hold policy-making positions, but they cannot enter into new non-compete agreements with these executives after the Effective Date.

Notable Exceptions:

• The Final Rule does not apply to non-competes entered into as part of the bona fide sale of a business entity.
• Non-competes enforced before the Effective Date of the Final Rule are not impacted.
• The Rule does not prohibit employers from enforcing non-compete clauses if they have a good-faith belief that the rule is inapplicable.

Employer Obligations:

• Employers must provide clear and conspicuous notice to workers subject to prohibited non-compete clauses by the Effective Date through hand-delivery, mail, email, or text message.

State Law Preemption:

• The Final Rule supersedes state laws only to the extent that they permit or authorize conduct prohibited under the Final Rule or conflict with the Rule’s notice requirements.

Analysis and Guidance

Impact on Non-Disclosure and Non-Solicitation Agreements:

• While the Final Rule only explicitly bans non-compete clauses, and seeks to exempt other restrictive covenants like non-disclosure and non-solicitation agreements, the ban may well affect those other restrictive covenants if they are so broad as to function similarly to non-competes by preventing workers from seeking or accepting other employment.

Anticipated Legal Challenges:

• The Final Rule is expected to face legal challenges from pro-business organizations like the Chamber of Commerce based on constitutional doctrines, including the Major Questions doctrine and the Non-Delegation doctrine.
• The Major Questions doctrine requires clear and direct authority from Congress for regulatory actions with significant economic and political implications, which may challenge the FTC’s rule-making authority.
• The Non-Delegation Doctrine restricts Congress from transferring legislative powers to other branches without clear guidelines, potentially invalidating the FTC’s authority to implement the ban.

Economic Consequences:

• The FTC estimates that the ban will affect 1 in 5 U.S. workers, resulting in an estimated economic impact of $400 billion to $488 billion in increased wages over the next decade.

Frequently Asked Questions

1. What happened?

The FTC voted 3-2 to ban most non-competes for U.S. workers, covering both employees and independent contractors.

2. Are non-compete agreements void right now?

No, the rule is not effective until 120 days after publication in the Federal Register, assuming it is not enjoined by legal challenges. The Effective Date is September 4, 2024.

3. What should employers do in the meantime?

Monitor legal developments and prepare to send notices to impacted employees. Evaluate existing non-competes and consider whether any senior executives should sign non-competes before the rule’s effective date.

4. Why did the FTC implement this ban?

The FTC concluded that non-competes stifle competition and depress wages, and banning them would promote competition, innovation, and increased wages.

5. What are the exceptions?

The rule does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and businesses subject to the Packers and Stockyards Act.

Existing agreements with “senior executives” and non-competes entered into as part of a bona fide sale of a business are also exceptions.

6. Does the rule apply retroactively?

Yes, the rule bans new non-competes and invalidates existing ones, with limited exceptions.

7. Does the ban only apply to non-competes?

On its face, the rule only applies to non-competes and does not ban other restrictions like confidentiality or non-solicitation provisions. However, if these provisions function similarly to non-competes, they are considered non-competes under the Final Rule.

8. Will the rule be challenged?

Yes, several lawsuits have already been filed, and more challenges are expected.

9. How is a non-compete defined under the Final Rule?

The Final Rule defines a “non-compete clause” as a term or condition of employment that prohibits or penalizes a worker for, or functions to prevent a worker from, seeking or accepting work in the U.S. with another person or operating a business in the U.S. after their employment ends.

Conclusion

The FTC’s non-compete ban represents a significant shift in employment law with wide-reaching implications for employers and workers alike. Understanding the key provisions and preparing for compliance is essential to navigate this new regulatory landscape effectively.

Please don’t hesitate to contact us if you would like to have your noncompete situation evaluated.