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The Federal Trade Commission voted on April 23, 2024 to adopt a final rule banning non-competes, determining that non-competes are an unfair method of competition. The rule will take effect within 120 days after publication in the Federal Register, which should happen within a few days. However, it is expected that business groups will challenge the legality of the rule, which may delay its effective date.
The new rule applies to both employees and independent contractors, as well as volunteers and interns. While non-competes are banned by the new rule, non-solicitation covenants are still permitted under federal law (although state laws may ban non-solicitation covenants).
The ban distinguishes between ordinary workers and senior executives, with slightly different treatment for each. For ordinary workers, it will be illegal to:
(a) enter into or attempt to enter into a non-compete;
(b) enforce or attempt to enforce a non-compete; or
(c) represent that the worker is subject to a non-compete.
For senior executives, it will be illegal to:
(a) enter into or attempt to enter into a non-compete;
(b) enforce or attempt to enforce a non-compete entered into after the effective date of the new rule; or
(c) represent that the worker is subject to a non-compete, where the non-compete was entered into after the effective date of the new rule.
The distinguishing element for senior executives is that employers can try to enforce non-competes entered into before the effective date of the rule. A senior executive means a worker who:
(a) was in a policy-making position, and
(b) received compensation as follows –
(i) total annual compensation of at least $151,164 in the preceding year; or
(ii) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
(iii) total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure, if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete.
Total annual compensation includes salary, commissions, non-discretionary bonuses and other non-discretionary compensation. It does not include payments for health insurance, life insurance, contributions to requirement plans, and the cost of similar fringe benefits.
A policy-making position means a company’s president, CEO, any other officer who has policy-making authority, or any other person who has policy-making authority. Policy-making authority means “final authority to make policy decisions that control significant aspects” of a company, and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or affiliate. So, a person could meet the compensation thresholds, but not be considered a senior executive if that person does not have final authority over policy decisions that control significant aspects of the company.
There is a new notice requirement for existing non-competes. For any existing non-competes that are now illegal under the new rule, the employer must provide a “clear and conspicuous notice” to the worker by the effective date of the rule (i.e., within the next 120 days), stating that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. This notice must:
(a) identify the employer
(b) be on paper delivered by hand to the worker, or by mail at the worker’s last known address, or by email to the worker’s current work email or last known personal email, or by text message to the worker’s mobile phone.
This notice must be sent to current and former workers. However, if the employer has no record of a street address, email address, or mobile phone number for a particular worker, the employer does not have to send a notice to that worker. The FTC has provided model language that can be used for these notices, and if you use the model language, you will be considered in compliance. A copy of the model language is available from us upon request, at no charge.
There are some exceptions to the ban on non-competes:
- First, you will be able to use non-competes in connection with the sale of a business, of the person’s ownership in a business, or of all or substantially all of a business entity’s operating assets.
- Second, the ban will not apply where a cause of action related to a non-compete accrued prior to the effective date. This means that if a worker has already violated a non-compete prior to the effective date, the employer can seek to enforce the non-compete.
- Third, it is not illegal to enforce or attempt to enforce a non-compete, or to make representations about a non-compete clause, where the employer has a good faith basis to believe that the ban on non-competes does not apply.
Note that the new rule displaces any state laws governing non-competes that are less restrictive, but does not displace state laws that are more restrictive. For example, California’s law is more restrictive in the sense that there are no distinctions between ordinary workers and senior executives, so the California law would apply in those situations.
Next Steps
If you own a business that may have used non-competes, either with employees or with contractors, volunteers, or interns, you should compile a list of those workers and their contact information. Then you should send the required notice to them. You should also review whether any might be considered “senior executives” under the new rule. You should also review your employment agreement templates, offer letter templates, contractor agreement templates, and any other types of agreement templates that may include non-competes, and delete those provisions from the templates. You may want to wait for a period of time to see if any court challenges result in a delay of the effective date.
We are available to guide you in determining how the new rule applies to your business. Contact our team today.
