FTC Enacts Ban on Non-Compete Agreements

UPDATE: FTC Enacts Ban on Non-Compete Agreements: What Employers Need to Know

By Liz Hartsel and Leni Plimpton

On Tuesday the Federal Trade Commission voted 3-2, to implement a comprehensive ban on non-compete agreements nationwide, calling them an “unfair method of competition.” The rule, once effective, will prevent companies from enforcing existing (i.e. pre-effective date) non-competes on any workers other than senior executives (i.e. workers earning more than $151,164 annually who are in a “policy-making position.”).

The final rule bans all new noncompete agreements for all workers, including senior executives. The rule goes even further, however–and bans (much like Colorado recently did) even attempting to enter into or enforce a non-competition agreement. In fact, simply representing that a person is subject to a non-compete would also violate the rule. In addition, the measure requires employers to provide written notice to all current and former employees letting them know that their non-compete is no longer enforceable. The measure includes an express exemption for causes of action related to a non-compete that accrued prior to the Effective Date, preserving ongoing litigation. 

The new rule takes effect on September 4, 2024 (the “effective date”). The rule is highly controversial and hotly protested by many in the business community. Indeed, it is soon to be challenged in court by the U.S. Chamber of Commerce, and almost certainly multiple other entities and businesses.

What About Customer Non-Solicit Agreements?  

It is unclear if the FTC would view a customer non-solicit (or similar) as a type of non-compete like Colorado does. The term “non-compete clause” is defined by the FTC to include a contract that “prohibits…penalizes…or functions to prevent a worker from seeking or accepting work . . . with a different person…” The unknown question is whether “functions to prevent” include a customer non-solicitation agreement. 

Key takeaways:

  • ALL non-competes in existence prior to the effective date will soon be unenforceable nationwide except for senior executives. 
  • No new non-competes are allowed after the effective date, even for senior executives.
  • The rule broadly defines “worker” to include independent contractors.
  • The rule contains an exception for non-competes entered as part of the sale of a business.
  • Knowing failure to follow the rule can subject the violator to penalties of $10,000 per violation.
  • Employers must give written notice, within 120 days of the Effective Date, to all employees subject to a non-compete (who do not qualify as senior executives) that informs them that their existing non-compete agreement is unenforceable.

What Should Employers Consider Doing Now?

  • Immediately review their policies and practices regarding non-competition agreements and determine whether they have agreements that are soon to be unenforceable under the FTC rule. 
  • Prepare to provide the required notice to workers or former workers who are currently (i.e. prior to the effective date) subject to non-competes, with the exception of senior executives. 
  • Confer with their employment law attorney regarding possible strategies, such as entering into noncompetes with senior executives before the Effective Date (to the extent possible under applicable state laws, which would still apply to limit non-competes). 
  • Non-disclosure, proprietary information, and confidentiality agreements are likely to become even more critical for protecting employers’ interests absent the ability to implement non-competes. It would be wise to evaluate the strength of any existing agreements and implement them where possible (while remaining careful not to violate new and ever-changing labor and other laws that affect confidentiality agreements).
  • Engage or consult with qualified employment counsel who will stay abreast of breaking developments and can provide advice tailored to your specific business’s needs.

If you have questions about this ruling or need assistance taking any of the steps recommended above, please contact a member of the Fortis employment law team

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