New Federal Trade Commission Rule Regarding Noncompetes

New Federal Trade Commission Rule Regarding Noncompetes

On Tuesday, April 23, 2024, The Federal Trade Commission issued a new rule that will become effective as of 120 days from the date of publication in the Federal Register, most likely some time in September. The FTC has determined that noncompete clauses are an unfair method of competition and therefore a violation of Section 5 of the FTC Act.

What this means for Employers:

As of the effective date, all new non-compete clauses are banned. For workers who are not senior executives, existing non-competes will no longer be enforceable after the final rule’s effective date. Employers must provide such workers with existing non-competes notice that they are no longer enforceable. The final rule contains model language that satisfies the notice requirement and can be found at the end of this notice.

Existing non-competes entered prior to the effective date with senior executives can remain in force. The final rule does not affect such agreements.

Important Terms defined:

The final rule defines the following important terms:

A “non-compete clause” is “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.”

A “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

“Employment” is defined broadly as “work for a person”.

 “Worker” is “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

“Senior executives” are workers earning more than $151,164 annually and who are in policy-making positions.

Alternative ways to protect your company without a non-compete clause:

Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. The FTA’s final rule does not prohibit the use of non-solicitation agreements by which an employee agrees not to solicit existing customers and employees of your company.

Additionally, the final rule does not apply to concurrent job restraints (like a non-compete that prevents moonlighting with a competitor). The rule is limited to post-employment restraints.

To comply with the final rule, small entities must do three things.

First, to comply with § 910.2(a)(1)(i) and § 910.2(a)(2)(i), which state it is an unfair method of competition to enter into a non-compete with a worker, small entities can no longer enter into new noncompetes with incoming workers, including senior executives. This may necessitate revising human resources materials, manuals, and template or form contracts to ensure they are compliant with the new regulations. It may also include making strategic decisions regarding workers’ employment terms.

Second, to comply with § 910.2(a)(1)(ii) and (iii), small entities cannot enforce (or make misrepresentations about) existing non-competes for workers other than senior executives after the effective date.

Third, businesses must provide notice to workers other than senior executives that the worker’s non-compete will not be enforced against the worker. Here is sample language for that notice:

“A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DA TE OF THE FINAL RULE]:

• You may seek or accept a job with any company or any person-- even if they compete with [EMPLOYER NAME].
• You may run your own business-- even if it competes with [EMPLOYER NAME].
• You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC's new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit [ link to final rule landing page]. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese Tagalog, and Korean, are available at [URL on FTC's website].”

If you have any additional questions, please contact the Business and Real Estate department of Curran Law Firm.