The FTC recently passed a new rule banning non-competes for most employment scenarios. The FTC’s reasoning for the new rule is to “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
AS AN EMPLOYER, WHAT DOES THIS MEAN FOR YOU?
The ban is a federal ban and applies to nearly all employers, so long as the employer is covered by the FTC. A few examples of employers who might not be subject to this rule are certain banks, credit unions, air carriers and a few others.
The ban is scheduled to take effect on September 4, 2024 (the “Effective Date”). This means that, barring any injunctions or court intervention, employers will need to comply with the new rule by the Effective Date. Employers are not permitted to enforce or attempt to enforce any non-competes that are already existing, or attempt to enter into any new non-competes. There are very limited exceptions to this rule, which are discussed later in this article.
Beyond not being permitted to enter into new non-competes or attempting to enforce any existing non-competes, employers also have an active obligation to notify these workers that any pre-existing non-compete is void, and the employer will not attempt to enforce the non-compete. These notices must identify the person who entered into the non-compete with the worker, and be in writing, delivered by hand, mail, email, or text message directly to the worker.
What type of employment relationships are covered?
The FTC did not restrict this ban to W-2 employees. The FTC uses the term “worker” and defined it to include not only employees, but also independent contractors, interns, volunteers, or any other natural person who works or worked with out without pay, regardless of their title.
What does this mean for other types of restrictions?
The non-compete ban does essentially what it says. It bans non-competes. The ban does not include other restrictive covenants, such as non-disclosure agreements, trade secret protections, or non-solicitation clauses. So long as these agreements and clauses are not a covert way of creating a non-compete, these clauses will be permitted.
What are these exceptions?
As mentioned earlier in this article, there are very few exceptions to the rule, but they do exist. The rule permits non-compete clauses to remain that were entered into prior to the Effective Date with “senior executives.” A “senior executive” is limited to an employee in a “policy-making position” who earned the equivalent of $151,164 or more in annual compensation for the prior year. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives.
There are a few other exceptions to the rule which mostly focus on existing lawsuits, and non-compete clauses that are entered into in conjunction with the sale of an entity or a person’s ownership interest in an entity.
Are there any challenges to the rule?
As this is a federal ban on nearly all non-competes, there have been numerous challenges filed with courts to attempt to block the rule from going into effect. The United States District Court for the Northern District of Texas is expected to make a decision in one such lawsuit by July 3, 2024. As there have been no decisions at this point, we cannot predict the likelihood of the delay or continuation of the current Effective Date.
The Oracle Legal Group is available to discuss this rule, see if any of your workers qualify under the exception, and to assist with the required notice as well as reviewing and revising any agreements that might have any of the banned restrictive covenant.
