Article by Camden Navarro Massingill and Eleanor Winn Nordholm
On April 23, 2024, the Federal Trade Commission (the “FTC”) issued its Final Rule on non-compete clauses, aiming to address concerns surrounding their impact on competition and labor mobility. The Final Rule, which largely mirrors the proposed ruling issued in January 2023, represents a significant shift in policy. It imposes a national ban on all for-profit employers from using non-compete clauses in contracts with employees and independent contractors at any level, with a few exceptions.[1]
Key Points of the FTC Final Rule:
Broad Definition of “Non-Compete” Clauses: The FTC Final Rule defines “non-compete clauses” broadly and includes de facto clauses that are tantamount to non-competes, such as contractual restrictions so broad in scope as to effectively prevent a worker from working in the same field. Nondisclosures, non-solicitations, and other similar restrictive covenants are not generally prohibited, however, unless they function as a de facto noncompete under the rule’s definition.
“Senior Executive” Exception: The FTC Final Rule does carve out from its prohibition a limited set of existing non-compete clauses with “senior executives,” earning at least $151,164 annually in total compensation. The FTC defines “senior executives” as workers in a “policy making position,” and clarifies that “policy-making authority” means the final authority to make policy decisions that control significant aspects of a business entity. This “senior executive” exception does not apply to new contracts entered after the effective date of the Final Rule.
Other Limited Exceptions: The Final Rule does not prohibit non-competes (1) applying to sellers in a bona fide sale of a business; or (2) between franchisors and franchisees.
Notification Requirements: The Final Rule requires employers to provide written notice to all current and former workers that are bound by unexpired non-compete clauses that their non-compete will not be enforced.
Excluded Entities: The Final Rule does not apply to entities not subject to the FTC Act, including nonprofit institutions, common carriers, and most banks.
Final Rule Enforceability:
The Final Rule is scheduled to come into effect 120 days after publication in the Federal Register, which is likely to happen in the next week. The rule, however, is being actively challenged under several statutory and Constitutional theories, and courts may ultimately block enforcement.
Even if found to be unenforceable, non-competes are continuing to face restriction and prohibition at the state-level; accordingly, it is advisable to be aware of non-compete laws in the states where your employees work.
Recommended Next Steps for Compliance with the FTC Final Rule:
Review Existing Agreements: Employers should conduct a comprehensive review of existing non-compete clauses and agreements to determine which employees would qualify as “senior executives” under the Final Rule.
Prepare Notices for Non-Senior Executives: Employers should consider preparing template notices for non-senior executives to be delivered prior to the effective date. The Final Rule includes model language for employers to use that fulfills this notice requirement.
Update Policies and Procedures: Assuming the rule survives court challenge and is allowed to go into effect, employers will need to update their policies, procedures, and agreements to reflect the changes mandated by the FTC ruling. This may include revising not only template contracts, but employee handbooks, training materials, and HR protocols. Attention should be paid to the effective use of nondisclosure and non-solicitation provisions, and other restrictive covenants. Similarly, use of other options, such as fixed-term employment contracts, “garden leave,” and the use of contingent or accrued bonuses could be considered.
Wyche is available to assist you in navigating the changes brought about by the FTC Final Rule and minimizing the risk of non-compliance.
[1] This update is not legal advice. Please consult an attorney for guidance on your particular situation.
