FTC Rule Banning Non-Competes
On April 23, 2024, the FTC voted to issue its Final Rule banning non-competes in most cases. The Final Rule defines a non-compete as a term that prohibits, penalizes, or functions to prevent workers from: (i) seeking or accepting work with an entity after the conclusion of the worker’s employment; or (ii) operating a business after the conclusion of employment. Specifically, employers are prohibited from: (i) entering into or attempting to enter into a non-compete clause; (ii) enforcing or attempting to enforce a non-compete clause; and (iii) representing that a worker is subject to a non-compete clause. The Final Rule specifies that the prohibited term or condition can be in the form of a written contract or written or oral workplace policy. The Final Rule also requires employers that have previously entered into prior non-compete clauses with workers to provide clear and conspicuous notice by its effective date to all applicable workers that their non-compete clause will not be, and cannot be, enforced.
There are exceptions. The Final Rule contains a grandfather clause, which permits existing non-competes to remain in effect for “senior executives,” while such clauses are immediately unenforceable for other workers once the final rule becomes effective. “Senior executives” are defined as individuals in policymaking positions who made a total annual or annualized compensation of $151,164 in the preceding calendar year. Moreover, the Final Rule does not prohibit employers from entering into or otherwise enforcing agreements with workers such as no-solicitation agreements, non-disclosure/confidentiality agreements, or return of property agreements. Provided, however, that the final rule also recognizes that those types of agreements cannot be so overly broad that their practical effect creates a noncompete. Employers may also still seek to hold departing employees responsible for violations regarding misappropriation of trade secrets and/or misuse of computer systems. The Final Rule also carves out franchisor-franchisee relationships and states that it does not apply to a non-compete clause entered into as a result of a bona fide sale of a business entity or substantially all of a business’s assets, or a person’s ownership interest in same. It similarly does not apply where a cause of action has already accrued.
Moving forward, the Final Rule is not set to go into effect for 120 days after its publication. In the intervening period, the general prohibition on non-competes will not be in effect. Moreover, The U.S. Chamber of Commerce has already filed a lawsuit against the FTC to prevent the Final Rule from ever going into effect, and we anticipate extensive litigation on its enforceability that may, at a minimum, delay its effective date., with a primary focus on the FTC exceeding its authority in implementing its Final Rule. It would not be surprising if a federal judge enjoins the final rule from taking effect before the 120-day period ends; nor would it be surprising if the Final Rule never becomes effective. As such, particularly in the immediate future while “the dust is still settling”, although it is a good idea to begin strategizing for the Final Rule to go into effect and be prepared to proceed to protect employer interests, patience and maintaining status quo is encouraged until there is more information. During this period, employers can still enter into non-compete agreements with employees if permitted under state law but should consider adding additional language to any agreements making clear that they are enforceable only to the extent permitted by law.
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Scott Kamins is an experienced labor and employment attorney at Offit Kurman. He has worked with CSC members for 17+ years, giving legal advice, speaking at the CSC Annual Convention, and offering free webinars on issues that matter most to textile rental laundries.
skamins@offitkurman.com