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FTC Final Rule Out Today: Ban on Non-Competes Effective September 4, 2024


May 7, 2024- Moments ago, the Federal Trade Commission (FTC) published its final rule that will prohibit the use of non-compete agreements beginning September 4, 2024. Here is what you need to know:

 

Businesses Covered by the Rule

 

The rule covers all types of businesses in nearly all industries. Some businesses are outside the FTC’s jurisdiction and therefore not subject to the rule. These include banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits. In addition, the rule specifically excludes non-compete agreements between businesses and franchisor/franchisee non-compete agreements. It also excludes certain nonprofit healthcare employers, although this will depend greatly on the facts concerning the healthcare organization.

 

New Non-Competes Prohibited Entirely

 

Entering into non-competes with employees will be prohibited beginning September 4, 2024. This includes employees at all levels, as well as independent contractors, paid or unpaid workers, including externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client.

 

The rule defines a “non-compete clause” 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 includes the term or condition.”

 

The rule does not prevent employers from entering into other forms of restrictive covenants with workers (such as non-disclosure and non-solicitation restrictions), provided they are not written so broadly as to constitute “de facto” noncompete clauses.

 

The rule also contains an exception permitting worker non-compete clauses entered into in as part of a bona fide “sale of business.”

 

Existing Non-Competes Will Be Unenforceable For All But “Senior Executives”

 

The rule invalidates existing non-competes for all but “senior executives.” The rule defines a senior executive as a worker earning more than $151,164 annually and who is in a policy-making position. Existing agreements with a senior executive that predate the final rule’s effective date remain in force, subject to any applicable state laws governing the agreement.

 

The FTC provides a back channel for reporting any non-complying businesses at noncompete@ftc.gov.

 

Employer Notice Requirements to Employees with Invalidated Non-Competes

 

Companies that have non-competes with workers other than “senior executives” must provide written notice to the workers that their non-competes are no longer in effect and may not be enforced against them. This notice must go out before the effective date of September 4, 2024.

 

The notice must follow several guidelines:

 

  • It must be in writing, either in a digital or paper format.

  • It must provide “clear and conspicuous” notice that identifies the person who entered into the non-compete with the worker.

  • It must go out to both current and former workers subject to non-compete clauses. An employer is exempt from the notice requirement where it has no record of the worker’s street address, email address, or mobile telephone number.

 

The rule provides a model notice that complies with the notice requirements. Employers may use their own notices, but they must comply with the content required under the rule. The model notice is available here.

 

Future of the Rule

 

Several business groups, including the U.S. Chamber of Commerce, have filed lawsuits in federal courts challenging the validity of the rule. One of the first suits filed asks a federal district court in Texas to issue a nationwide preliminary injunction staying the rule’s September effective date. However, until a court issues such relief, the clock will continue to move along until the effective date of the rule, at which time the rule will come into force.

 

Editor’s NoteThe FTC final rule on-competition agreements will be explained in detail in an Executive Briefing on June 20, 2024. To reserve attendance, contact Jessenia Narvaez, Office Manager, at jessenianarvaez@robertnoonan.com or (860) 349-7010.

 

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