For a long time, as attorneys we have drafted for you, our clients, employment agreements with non-competition provisions. The reason for these provisions was to limit your employees from going to a direct competitor and using the knowledge he/she/they learned while working for you.
However, on April 23, 2024, the Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (“final rule”) effectively banning employee non-compete agreements throughout the United States. The FTC determined that the use of non-compete agreements with workers constitutes an “unfair method of competition.”
Effective date: September 4, 2024.
Which employers are covered: Most, except for not-for-profit entities, and certain financial institutions.
Which employees are covered: The Final Rule defines “worker” broadly to include employees, independent contractors, externs, interns, volunteers, apprentices, and certain sole proprietors. A “worker” does not include a franchisee in the context of a franchisee-franchisor relationship.
What aspects of competition are banned? A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- seeking or accepting work in the United States with a different person where such work would be with a competitor, or competing business; or
- operating a business in the United States that competes with the employer’s business.
What protections appear to remain available to employers:
- Confidentiality and non-disclosure provisions;
- Non-solicitation provisions with regard to customers or employees; and
- Training/educational assistance repayment agreements.
Key exclusions:
The Final Rule allows enforcement of existing non-competes with “senior executives,” but prohibits employers—as of the effective date—from agreeing to or enforcing new non-competes with senior executives.
- The Final Rule allows enforcement of existing non-competes with “senior executives,” but prohibits employers—as of the effective date—from agreeing to or enforcing new non-competes with senior executives.
- The Final Rule defines “senior executive” to mean a worker who is in a “policy-making position” and received “total annual compensation” of at least $151,164 in the preceding year (which may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the preceding year, but does not include the cost of, or contributions to, fringe benefit programs).
- The Final Rule permits employers to enforce non-compete covenants that are entered pursuant to the bona fide sale of a business entity, of the person’s ownership in a business entity, or of all or substantially all of the entity’s operating assets.
What do employers need to do before September 4, 2024:
Employers will need to give written notice to all employees with existing non-compete clauses that those covenants not to compete will be invalid as of the effective date.
The FTC provides the following model notice:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a noncompete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN September 4, 2024], [EMPLOYER NAME] will not enforce any noncompete clause against you. This means that as of [DATE EMPLOYER CHOOSES]
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
Please note that there have already been several lawsuits filed contesting this new rule. We will keep you informed if any part of this new rule is rescinded.
For additional information about the content in this post or assistance with any questions about your business, the attorneys at B&D are ready to help you. Reach out to us.
