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Ban on Non-Compete Agreements

Upcoming Federal Ban on Non-Compete Agreements

In a significant move that will impact both employers and employees across the country, on May 24, 2024, the Federal Trade Commission (FTC) published a Final Rule banning non-compete agreements for employers under its jurisdiction. With limited exceptions, the Final Rule prohibits employers from entering new non-compete agreements with workers and requires employers to notify workers with existing non-compete agreements that those agreements will not be enforced after the effective date of the rule. The rule is scheduled to go into effect on September 4, 2024. If it survives legal challenges, it will mark a pivotal moment in employment law.

Who is Affected

The Final Rule covers employers within the FTC’s authority, which includes all types of businesses in nearly all industries. Some employers are outside the FTC’s authority and therefore not subject to the rule. This includes banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.

The rule applies to non-competes with all workers, whether full-time or part-time, including employees, independent contractors, interns, externs, apprentices, and others—but there are different requirements for senior executives as defined by the rule.

Effective Date and Lawsuits

The Final Rule was published on May 24, 2024, but is set to take effect on September 4, 2024, provided no legal challenges are successful in delaying the effective date. At least three lawsuits have been filed seeking to delay enforcement, with judges in the cases indicating they will issue decisions on preliminary injunctions by July, 2024. 

Details

Prohibitions.  The Final Rule prohibits the use of non-compete clauses in agreements between employers and workers in almost all circumstances. The rule defines a “non-compete clause” as a term or condition of employment that prohibits, penalizes or functions to prevent a worker after their employment ends from

  • seeking or accepting work in the United States with a different person, or 
  • ­ operating a business in the United States 

The Final Rule broadly prohibits employers from entering new non-compete agreements with workers and provides that existing agreements will become unenforceable after the rule’s effective date. The rule exempts existing agreements between employers and “senior executives–defined as workers who act in a “policy making position” and who received at least $151,164 in total compensation in the preceding year (annualized to $151,164 if the worker was employed for a partial year). 

Notice to Workers.  The Final Rule requires employers to individually notify all affected workers (both current and former) before the effective date of the rule that their non-compete provisions will no longer be enforceable as of that date. The notices must be provided in writing and may be delivered by hand, email, text message or regular mail. In addition, the notice must identify the person who entered the non-compete agreement with the worker. If you don’t have any contact information for a former worker, you don’t have to send the notice. The FTC has published a Non-Compete Rule: Compliance Guide for Businesses, containing model notices which can be used to satisfy this notification requirement.

Penalties.  The Final Rule provides that it is an “unfair method of competition”—and therefore a violation of the Federal Trade Commission Act (FTC Act)—for an employer to enter a non-compete agreement with a worker. Accordingly, businesses under the FTC’s authority may be subject to an FTC enforcement action if an employee or someone else makes a complaint, potentially resulting in the imposition of penalties and/or injunctive relief.

Effect on State Rules.  As a federal regulation, the Final Rule preempts conflicting (more permissive) state laws, regulations, and rules. To the extent that state law provides greater protections to workers, however, employers must comply with state law.

Exceptions 

  • Other post-employment restrictions (confidentiality/non-disclosure; non-solicitation; training repayment agreements). The rule does not explicitly apply to other types of post-employment restrictions, such as confidentiality/non-disclosure agreements, non-solicitation agreements, or Training Repayment Agreement Provisions (“TRAPs”), which require workers to reimburse employers for training expenses if they leave their job before a specified date. Accordingly, those types of restrictions are permissible under the rule, provided they don’t function to prohibit a worker from seeking other work or starting a business, and are not “so broad or onerous in scope that [they] functionally have the same effect…”
  • Sale of business entity.  The non-compete prohibition does not apply to a selling business owner who agrees to non-compete restrictions for themself in connection with a “bona fide sale” of their business. The rule clarifies what constitutes a “bona fide sale of a business entity.”
  • Garden Leave. The Final Rule provides that “garden leave” arrangements may be permissible, if they do not contain restrictions on post-employment work. A typical “garden leave” agreement provides that a worker is still employed by the employer and receives the same total annual compensation and benefits on a pro rata basis, although the worker does not perform actual services. The FTC emphasized that such arrangements cannot include post-employment restrictions at the end of the garden leave arrangement which prohibit a worker from seeking other work or starting a business or functionally have the same effect.
  • Pre-existing causes of action. The Final Rule provides an exception for causes of action related to non-compete agreements that accrue before the effective date of the rule. Accordingly, workers who breach non-compete agreements before the effective date of the Final Rule may still be subject to liability after the rule takes effect.
What Employers Should Do

As the effective date approaches, employers should take proactive measures to ensure compliance with the new rule, if and when it takes effect. 

June and July
  • Review current agreements, documents and websites that contain non-compete provisions; Gather and make a list of them.
    This applies to all contracts, paperwork and websites affecting all workers, including all employees, senior executives and contractors. Review existing employment, severance, equity and other contracts, as well as employee handbooks, policies, other documents and websites that contain non-compete provisions applicable to workers.
  • Take the opportunity to review current non-compete agreements to determine if they are narrowly-tailored as needed to protect proprietary company information and only apply to necessary employees (i.e. excluding low-level workers without access to confidential company information (client lists, marketing strategy, pricing lists, etc.). 
August

If no court decisions have blocked enforcement of the rule by August 1st, take preliminary action to comply with the ruling and protect trade secrets:

  • Prepare required notices to current and former workers who are not senior executives that their non-competes will be unenforceable as of September 4th.
  • Have Workers Sign Confidentiality/Non-Disclosure, Non-Solicitation and Training Repayment Agreement Provisions, if not already in place.
    Under the FTC rule, employees can still be required to sign confidentiality or non-disclosure agreements to prohibit employees from disclosing or using confidential information for their own benefit or that of a competitor. It is advisable to have employees sign separate confidentiality agreements, even if confidentiality provisions are included in the Employee Handbook.
  • Secure Physical and Digital Assets
    Take this as an opportunity to review and update procedures to protect confidential information and trade secrets from theft or misuse by current and departing employees. Review policies and procedures restricting access to physical files and digital data, and encrypt digital files. Setting up a regularly scheduled review and audit process can help identify and address potential vulnerabilities going forward.
  • Provide training to management and HR personnel on the implications of the ban.
    Educate workers (employees and contractors) about the importance of protecting trade secrets and the consequences of unauthorized use or disclosure of sensitive company information. This should be formalized as a regular part of the hiring, onboarding and offboarding processes and reinforced through regular training.
On or before September 4

If no court decisions have blocked enforcement of the rule by September 4th, take action to comply with the ruling:

  • Give notice to current and former workers with active non-competes–who are not senior executives–that their non-competes are unenforceable as of Sept. 4, 2024.
    Notice is not required for senior executives because their existing non-competes are not barred by the Rule.
  • Do not enforce existing non-competes going forward for workers other than senior executives.
    For workers other than senior executives, don’t enforce a noncompete in court or threaten workers or former workers with enforcement. You can still enforce an existing noncompete with a senior executive. You can also still enforce a claim that a noncompete was breached before the rule’s effective date.
  • Do not include non-competes in future employment contracts, paperwork, or websites.
    This applies to all contracts, paperwork and websites affecting all workers, including senior executives. This may involve revising contract templates, updating HR policies, and updating websites to comply with the new rule.
  • Monitor Departing Employees
    Be vigilant in monitoring the activities of departing employees to ensure compliance with ongoing confidentiality and non-solicitation obligations, in the absence of non-compete agreements. (This is true whether the FTC rule is implemented or not). This includes restricting access to sensitive information for departing employees prior to their leaveing, conducting exit interviews to remind departing employees of their confidentiality obligations and consequences of breach, and following up on employees’ future employment as appropriate.
  • Explore alternative strategies for retaining top talent to avoiding poaching by competitors, such as incentive-based retention programs, innovative perks, and preferred working conditions.
For additional guidance and FAQ’s from the FTC, download:
FTC Non-Compete Rule: Compliance Guide for Businesses

 

This article is for informational purposes only and is not intended as legal advice. Readers shouldn’t act or refrain from acting on the basis of any of the information provided in this update. Seek the advice of qualified counsel for specific legal questions. 

Picture of Allison McKeel

Allison McKeel

I'm an employment lawyer who has worked with hundreds of startup and established businesses and love to help dynamic companies get started and grow. Follow my blog for the latest legal news--designed to keep you legally compliant and up-to-date on innovative workplace practices.

This article is for general information only and is not intended as legal advice. Seek the advice of qualified legal counsel for specific legal questions. 

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