FTC Bans Noncompete Agreements: What employers need to know about the FTC’s Noncompete Rule
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a Final Rule (the “Rule”) prohibiting the use of non-compete restrictive covenants (with a limited exception) throughout the United States as an unfair method of competition under the FTC Act. The Rule is set to become effective 120 days after it is published in the Federal Register, but employers will face certain compliance obligations that will apply prior to the effective date.
The Rule prohibits employers from: (1) entering into; (2) attempting to enter into; (3) enforcing; (4) attempting to enforce; or (5) representing that a worker is subject to a non-compete clause. The Rule’s definition of “worker” is broad and expands beyond employees.
The Rule contains a limited exception that applies to non-competes with “senior executives” entered into prior to the effective date of the Rule. However, the Rule’s definition of “senior executive” is narrow and limited to individuals meeting a compensation threshold and holding a “policy making position,” which is further defined under the Rule.
Employers must provide “clear and conspicuous” written notice to each worker—past or present—who is currently subject to an existing non-compete clause. This notice must be provided prior to the effective date of the Rule and must comply with certain requirements in form and method of delivery. Employers should consult with legal counsel to ensure compliant notice is provided.
The Rule will face legal challenges. The U.S. Chamber of Commerce filed suit in an effort to block the implementation of the Rule. We anticipate the legal arguments against the Rule will attack the FTC’s authority to make a rule regulating unfair methods of competition, which has never occurred before and therefore is judicially untested. The Supreme Court’s recent hints and trend of challenging agency authority through newly bolstered legal doctrines such as the nondelegation doctrine and the major questions doctrine are likely on a collision course with the FTC’s Rule.
Despite these legal challenges, employers should consider taking action now to prepare for compliance with the Rule. We recommend taking the follow steps, in consultation with legal counsel, prior to the effective date: (1) determine who qualifies as a senior executive; (2) consider entering into compliant non-competes with those who qualify as senior executives prior to the effective date; (3) potentially replace non-compete agreements with other types of restrictive covenants not prohibited by the Rule; (4) determine the non-senior executive workers who are currently subject to non-compete clauses that will need to receive the required notice; and (5) consult with legal counsel on a strategy for whether, when and how to comply with the notice requirements.
