On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a new rule largely prohibiting non-compete restrictions in the workplace. This groundbreaking rule was published in the Federal Register on May 7, 2024, and is presently scheduled to become effective on September 4, 2024. However, the FTC’s final rule has already been subjected to court challenges, so it bears watching whether it will, in fact, go into effect at that time.
Notwithstanding the present uncertainty, employers and employees alike should understand the wide-ranging implications of the FTC’s new rule as it could largely reshape the dynamics of employer-employee relations.
Summary of FTC Rule
The FTC’s new rule will retroactively invalidate pre-existing non-competes with “workers” as of its effective date, with the exception of existing non-competes with “senior executives.” If the rule becomes effective, then employers will be required to provide notice to employees of the revocation of such existing non-compete restrictions. In sum, the new rule will effectively bar employers from entering into or enforcing non-compete restrictions for a broad spectrum of workers, including employees, independent contractors, and unpaid personnel, with only limited exceptions.
Key exceptions under the new regulation include:
- Senior Executives: While new non-compete pacts with employees will generally be prohibited, contracts in place with “senior executives” prior to the rule’s effective date will remain valid. The term “senior executives” is defined as workers earning more than $151,164 annually and who are in a “policy-making position.”
- Sale-of-Businesses: Also excluded from the ban are non-compete clauses entered into by a person pursuant to a bona fide sale of a business entity. This is a notable change from a previous version of the rule that was under consideration.
FTC’s Definition of Non-Compete
Per the rule, a “non-compete” restriction is defined 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 include the term or condition.”
Effect On Other Types of Restrictions
The FTC’s new rule does not categorically prohibit other types of restrictive agreements (such as non-disclosure agreements, non-solicitation agreements, and training repayment agreement provisions), but the restrictions will still need to be reviewed to ensure that such restrictions do not have the same functional effect of a non-compete. That determination will turn on the facts and circumstances of the particular restriction at issue. By way of example, the FTC provided illustrations of restrictions that could constitute a functional non-compete: (1) a nondisclosure provision that is “written so broadly that it effectively precludes the worker” from working in the same position for a new employer and; (2) a provision that requires a worker to repay training costs where the repayment is not “reasonably related to the costs” of the training.
The FTC’s Rule Is Being Challenged in Court Actions
It is important to note that at least two lawsuits have already been filed challenging the FTC’s authority to issue this rule. We will be monitoring the progress of those suits closely, as they may result in a delay of the effective date of the new rule and/or invalidate it altogether. Given the current status, employers should consider taking a “wait and see” approach to the FTC’s new rule at this point.
Proactive Steps for Employers
If employers prefer to be more proactive in preparing for the rule going into effect, then potential steps that employers can take include:
- Senior Executives: In light of the exclusion from the ban on non-competes with “senior executives” entered into prior to the rule’s “effective date”, employers may want to (1) review whether qualifying employees have existing non-competes, (2) assess whether employees’ compensation and responsibilities meet the definition of “senior executives,” and consider revising such employees’ pay or responsibilities, and (3) potentially enter into new agreements with qualifying “senior executives” prior to the rule’s effective date.
- Non-Disclosure and Non-Solicitation Provisions: If non-competes are largely banned, then the importance of other types of provisions that safeguard employers’ confidential information and goodwill will be magnified. Employers may want to review their strategies for safeguarding confidential information and client goodwill, including written agreements with employees as well as other practices to ensure confidential information and client goodwill are adequately protected.
- Functional Non-Compete Review: In consideration of the FTC’s ban on functional non-compete restrictions, employers may want to review other types of restrictions (such as trade secret protections, non-solicitation restrictions etc.) to assess whether such restrictions are overlay broad and have the functional effect of a non-compete.
- Notices: The new rule requires that notices be provided to employees regarding the invalidation of their non-competes and includes a model notice. Employers may want to start drafting those notices in preparation for the rule potentially going into effect.
Be Mindful of State Laws Regarding Non-Competes
While we are monitoring whether the FTC’s rule goes into effect, employers and employees should be ensuring they are acting in compliance with applicable state laws regarding non-competes. Many states, including Massachusetts, have implemented statutory changes that effect how and when non-competes can be enforced.