Who Qualifies as a “Worker” Under the FTC Non-Compete Clause Ban
When the Federal Trade Commission released its final ruling for the ban on non-compete clauses, it defined what a “worker ” for an employer was and whether the specific types of workers were a part of the general rule or a part of the exceptions to the ban. This article will delve into what the definitions of the term “worker” are, the exceptions to the definition, and how that can impact business owners moving forward when trying to understand the FTC ban when enacted.
Who is a “Worker” under the FTC Non-Compete Clause Ban?
Under §910.1(f) of the Non-Compete Clause rule published in the Federal Register on April 23rd, 2024, a worker is defined as:
“a 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. The term worker includes a natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.”
As seen above, this definition of the term “worker” is very broad in its scope, which allows almost every type of worker within the United States to fall under the definition. The FTC had input given to them by various commentors on the definition and who it should apply to. Several commentators wrote to the FTC arguing over the broadness of the “worker” definition, in which the Commission had several arguments for why the definition needs to remain broad in scope.
On pg. 102 of the FTC’s ruling, they argued that independent contractors do fall within the definition of a worker because “whether a worker is an employee or an independent contractor does not impact employers’ ability to exploit imbalances of bargaining power or limit employers’ ability to use less restrictive alternatives to non-competes to protect their intellectual property.” Therefore, although it would be good for employers for independent contractors not to be included in the definition, as the contractors have more bargaining power with companies compared to regular workers, the FTC kept them a part of the definition.
The FTC went on further to say that the inclusion of independent contractors, sole proprietors, and others was based on the reasoning that the commentators did not bring enough evidence to show why they should not be included in the definition. So, even though including these types of workers might be detrimental to small business owners trying to retain workers and contractors, the FTC decided to leave them in because there was not enough evidence to support the business owner’s findings. The argument is also dangerous because the FTC did not specify any evidence in their ruling to show that the inclusion would not be detrimental to business owners.
Senior Executives with Existing Non-Competes Prior to September 4th, 2024 are Not “Workers” within FTC’s Definition
Senior executives are the one major exception to the “workers” definition established within the FTC non-compete clause definition. A senior executive is defined as a worker who:
“1) Was in a policy-making position; and 2) Received from a person for the employment: i) Total annual compensation of at least $151,164 in the proceeding year; or iii) Total compensation of at least $1151,164 when annualized if the worker was employed during only part of the proceeding year or; or iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.”
A policy-making position consists of “any officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” Senior executives, through their policy-making authority, usually have learned trade secrets that could be harmful if given to a new company after their dismissal from their old business. Therefore, due to this increase of potential harm to business, senior executives are excluded from the definition of “workers” within the FTC non-compete clause ban.
Since senior executives are not included within the definition of “worker”, current non-compete clauses for senior executives can remain in effect once the ban goes into effect on September 4th, 2024. However, following the enactment of the FTC’s ban, business owners are not allowed to enact non-compete clauses on new senior executives. Again, once the ban is enacted, business owners are not allowed to enact any new non-compete clause for workers or senior executives.
How the Definition of Workers Positively and Negatively Impacts Business Owners
Due to the overly broad definition of what does and does not constitute a “worker” under the FTC’s non-compete clause final ruling, there could be both positive and negative impacts on small and large business owners. According to the FTC, no evidence suggests that the broad definition would negatively impact businesses. The FTC argues that non-competes are generally bad for both workers and business owners as they harm the fair competition of business and eliminate job opportunities that business owners and workers can search for. The FTC even stated that small businesses wrote to them saying that they “struggled to hire talented workers” due to non-compete clauses.
Yet, the positive or negative impacts of banning non-compete clauses will not be seen until the ban actually goes into effect. Although the FTC argues that the impact on small business owners will be positive, one cannot definitively say that until the ban is implemented. One could argue that the ban on non-compete clauses could hurt small businesses as it takes away their opportunities to protect their business from losing employees to a bigger competitor. Although there are fears that this rule will have a negative impact on small business owners, the FTC argues that it will be more positive than negative, and therefore, the ban should be allowed.
Conclusion
A worker is defined as anyone employed or previously employed, whether paid or unpaid, by an employer. Any worker that is under a non-compete clause, except for those who are considered senior executives, will no longer be under non-compete clauses starting on September 4th, 2024. If you have any questions regarding whether you are considered a worker or any other questions about the non-compete clause ban, please get in contact with your business lawyer.
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Author:
Chad Alvis
Chad is a legal intern for the firm and is pursuing his goal of becoming a lawyer. After receiving his Bachelor’s Degree of Arts in History and Political Science from New Mexico State University, Chad is currently entering his third year of law school at the University of New Mexico School of Law. Chad will receive his Juris Doctorate in the Spring of 2025 and take the New Mexico State Bar Exam the following August.
Chad wants to pursue a career in the Intellectual Property, Wills and Trusts, or Business Law sectors of the legal profession. Chad has worked for both New Mexico Legal Aid and the New Mexico State Fair office before working at Law 4 Small Business. He is focused on assisting the firm by performing research projects and helping the attorneys with whatever they need.
