FTC Finalizes Rule Banning Non-Compete Clauses
April 24, 2024
- Denny P. Major
Yesterday, April 23, 2024, the Federal Trade Commission issued a much anticipated final rule banning non-compete agreements. The final rule, which is effective August 21, 2024, prohibits any person (including business entities) from entering into or attempting to enter into a “non-compete clause.”
The rule defines “non-compete clause” as any term or condition of employment that prohibits or functions to prevent a worker from, or penalizes a worker for, 1) “seeking or accepting work in the United States” with a different person, or 2) operating a business in the United States. The term worker is defined broadly to include anyone who works or previously worked, regardless of the worker’s status as employee, independent contractor, or volunteer, etc.
Critically, the rule also prevents any person from “enforcing or attempting to enforce” existing non-compete clauses unless the worker is a senior executive. A worker is a “senior executive” if the worker was in a policy-making position and received total annual compensation of at least $151,164 in the preceding year (or $151,164 when annualized if the worker was only employed during part of the preceding year). In addition, the rule prohibits employers from representing that 1) a non-senior executive worker is subject to a non-compete clause, or 2) a senior executive is subject to a non-compete clause where the non-compete clause was entered into after the effective date (August 21, 2024).
In addition, the final rule requires employers to provide clear and conspicuous notice to workers (other than senior executives) by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The rule lists notice requirements, including a requirement that the notice be delivered in writing, and provides model language that employers may use for such notice.
The rule contains an exception for non-compete clauses entered into pursuant to a “bona fide” sale of a business (including ownership interest in the business or substantially all of the business’s operating assets). In addition, the rule does not apply where a cause of action related to a non-compete clause “accrued prior to the effective date.” This suggests that if a worker, even one who is not a senior executive, breached or breaches a non-compete clause at any point before August 21, 2024, then the prohibitions do not apply.
Similar to the proposed rule published in January, the final rule does not explicitly prohibit non-solicitation or non-disclosure covenants. However, such covenants are prohibited and unenforceable if they “function to prohibit” a worker from seeking or accepting work with a different employer, or from operating a business. As noted in the commentary of the final rule, the determination of whether a non-solicitation or non-disclosure covenant “functions to prohibit” a worker from accepting work with a different employer is a fact specific inquiry that will turn on the facts and circumstances of the particular covenant and the surrounding market context.
The new rule will likely face legal challenges. We will continue to keep you updated as to those developments. In the meantime, employers should proceed under the assumption that the rule will survive legal challenges and go into effect August 21, 2024. As of that date, employers can no longer enter into agreements that contain non-compete covenants. However, valid non-solicitation and non-disclosure covenants will remain enforceable. Ensuring that these restrictions are enforceable is even more critical in light of the FTC’s final rule. Employers also need to be prepared for the notice provisions.
Finally, it should be noted the rule suggests that non-compete covenants with “senior executives” will be valid if they are entered into prior to August 21, 2024. Such covenants would still need to satisfy the requirements of state law. Among other things, that means that the covenant must meet numerous stringent requirements. Among other things, it must be supported by adequate consideration and, under South Carolina law, continuation of employment, alone, is not adequate consideration. Employers who find themselves tempted to enter into non-compete covenants with senior executives prior to August 21, 2024 should consult with counsel regarding consideration and the other onerous requirements of non-competes.
A link to the published final rule can be found at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.
For more information on this topic, please contact Denny or a member of our Employment Law practice team.
Critically, the rule also prevents any person from “enforcing or attempting to enforce” existing non-compete clauses unless the worker is a senior executive. A worker is a “senior executive” if the worker was in a policy-making position and received total annual compensation of at least $151,164 in the preceding year (or $151,164 when annualized if the worker was only employed during part of the preceding year). In addition, the rule prohibits employers from representing that 1) a non-senior executive worker is subject to a non-compete clause, or 2) a senior executive is subject to a non-compete clause where the non-compete clause was entered into after the effective date (August 21, 2024).
In addition, the final rule requires employers to provide clear and conspicuous notice to workers (other than senior executives) by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The rule lists notice requirements, including a requirement that the notice be delivered in writing, and provides model language that employers may use for such notice.
The rule contains an exception for non-compete clauses entered into pursuant to a “bona fide” sale of a business (including ownership interest in the business or substantially all of the business’s operating assets). In addition, the rule does not apply where a cause of action related to a non-compete clause “accrued prior to the effective date.” This suggests that if a worker, even one who is not a senior executive, breached or breaches a non-compete clause at any point before August 21, 2024, then the prohibitions do not apply.
Similar to the proposed rule published in January, the final rule does not explicitly prohibit non-solicitation or non-disclosure covenants. However, such covenants are prohibited and unenforceable if they “function to prohibit” a worker from seeking or accepting work with a different employer, or from operating a business. As noted in the commentary of the final rule, the determination of whether a non-solicitation or non-disclosure covenant “functions to prohibit” a worker from accepting work with a different employer is a fact specific inquiry that will turn on the facts and circumstances of the particular covenant and the surrounding market context.
The new rule will likely face legal challenges. We will continue to keep you updated as to those developments. In the meantime, employers should proceed under the assumption that the rule will survive legal challenges and go into effect August 21, 2024. As of that date, employers can no longer enter into agreements that contain non-compete covenants. However, valid non-solicitation and non-disclosure covenants will remain enforceable. Ensuring that these restrictions are enforceable is even more critical in light of the FTC’s final rule. Employers also need to be prepared for the notice provisions.
Finally, it should be noted the rule suggests that non-compete covenants with “senior executives” will be valid if they are entered into prior to August 21, 2024. Such covenants would still need to satisfy the requirements of state law. Among other things, that means that the covenant must meet numerous stringent requirements. Among other things, it must be supported by adequate consideration and, under South Carolina law, continuation of employment, alone, is not adequate consideration. Employers who find themselves tempted to enter into non-compete covenants with senior executives prior to August 21, 2024 should consult with counsel regarding consideration and the other onerous requirements of non-competes.
A link to the published final rule can be found at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.
For more information on this topic, please contact Denny or a member of our Employment Law practice team.
