As of September 4, 2024, most employment-based non-compete clauses in the United States will be unenforceable unless a national injunction is issued in one of the numerous lawsuits that have already been filed challenging the final rule issued by the United States Federal Trade Commission (FTC) on April 23, 2024 (the “Final Rule”). The Final Rule was published in the Federal Register on May 7, 2024, and will become effective on September 4, 2024 (the “Effective Date”). The full text of the Final Rule is available here. Under the Final Rule, most existing non-compete provisions between an employer and an employee will be rendered unenforceable on the Effective Date and employers will be prohibited from subjecting employees to new non-compete clauses on a going forward basis after the Effective Date.
The Rule
The Final Rule is broad in its scope. Under the Final Rule, the term “non-compete clause” includes any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) [s]eeking 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 (ii) [o]perating a business in the United States after the conclusion of the employment that includes the term or condition.” The non-compete clause can be either written or oral and it can be either included in a contract or be part of a workplace policy. Under the Final Rule, the term “employment” means “work for a person,” and the term “worker” includes any “natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” Putting that all together, the Final Rule invalidates any clause or policy that either prohibits, penalizes, or functions to prevent a worker from seeking or accepting work from another employer or starting or operating a business after ceasing to be a worker for such worker’s current employer. The Final Rule does not invalidate provisions that restrict an employee during their current employment (e.g., a restriction that prohibits an employee from working for a competitor while employed by the employer).
Employers will need to carefully review contracts and policies they have with workers, because the term “non-compete clauses” under the Final Rule includes both express non-compete clauses and provisions that inadvertently have the effect of essentially operating as a non-compete clause. For example, non-solicitation provisions will need to be carefully reviewed, and modified as needed, to ensure they do not have the effect of preventing a worker from seeking or accepting employment or starting a business. Similarly, employers will want to make sure that any non-disclosure or confidentiality clauses do not indirectly restrict workers from seeking employment after the end of such workers’ employment.
Exceptions
There are four limited exceptions to the prohibition on non-compete clauses in the employment context. First, certain non-compete clauses that are in place prior to the Effective Date between an employer and certain “senior executives” will remain enforceable following the Effective Date. Who constitutes a “senior executive” is limited and determining whether a worker constitutes a “senior executive” requires a highly fact specific analysis on a case-by-case basis. Under the Final Rule, a “senior executive” is a worker who (a) was either serving in one of a list of enumerated officer positions or in a policy-making position and (b) either received, or would have received if the worker was not engaged for a full year, total annual compensation of at least $151,164. A worker is deemed to be in a “policy-making position” if such worker is “making decisions that have a significant impact on the business, such as important policies that affect most or all of the business.” The key factor here is that the worker must be the individual making the decision. The Final Rule clarifies that a worker does not become a “senior executive” if they are only “advising or exerting influence over such policy decisions.” Generally, under the Final Rule, “total annual compensation” includes things of value received by a worker from their employer, but expressly excludes reimbursements for travel expenses and fringe benefits paid for by the employer, including but not limited to health insurance and retirement contributions. Critically, this exception only extends to non-compete clauses with “senior executives” that were in place prior to the Effective Date.
Second, the Final Rule does not impact non-compete clauses entered into (both before and after the Effective Date) with an owner of a business entity in connection with a bona fide sale of such business entity. Non-competes entered in connection with a bona fide sale of a business will remain effective following the Effective Date.
Third, the Final Rule will not limit employer’s rights to pursue or continue pursuing causes of action arising out of a violation of a non-compete clause that arose prior to the Effective Date.
Fourth, the Final Rule does not prohibit the enforcement of non-compete clauses when the person seeking enforcement of the clause believes in good faith that the clause is not subject to the Final Rule. The applicability of this exception is extremely limited, because it was included more as a savings clause to prevent challenges against the Final Rule that are predicated on an argument that the Final Rule violates the First Amendment.
While not an exception to the Final Rule’s prohibition on non-compete clauses in the employment context, it is important to note that the Final Rule does not extend to non-compete clauses in agreements between businesses. That being said, because the term “worker” includes sole proprietorships, it is important to keep the Final Rule in mind when contracting with individual consultants who are not providing their services through a legal entity.
Notice to Workers Currently Subject to Non-Compete Clauses
Employers have an affirmative obligation under the Final Rule to notify all current and past workers who are subject to a non-compete clause that will no longer be enforceable after the Effective Date that such clause is no longer enforceable as of the Effective Date. The Final Rule includes model language that employers should include in their notice to such workers. If you would like any help in preparing this notice or reviewing the enforceability of non-compete clauses or similar provisions under the Final Rule, please feel free to contact us.
