FTC Final Rule on Non-Compete Clauses

On April 23, 2024, the Federal Trade Commission (FTC) voted to finalize a new rule to prohibit employers from enforcing non-compete agreements against workers.  The Commission’s Final Rule determined that non-compete agreements are an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act (FTC Act).  In the announcement, the FTC explained that the goal of this change was to reduce healthcare costs, encourage new business formation, create an increase in innovation, and raise worker earnings.

While the Chamber of Commerce of the United States of America, partnering with various business organizations, has filed suit in a Texas federal court seeking an order to vacate and set aside the Rule in its entirety, the Rule is set to take effect 120 days after it is published in the Federal Register.  Unless otherwise noted, all information has been taken from the Final Rule itself.

Who Does the Rule Effect?

According to the FTC’s Non-Compete Fact Sheet, on its effective date, the Non-Compete Rule will prohibit employers from entering into any new non-competes agreements with their employees.  According to the FTC’s Compliance Guide, the Rule applies to non-compete agreements with all full and part-time workers, including employees, independent contractors, interns, externs, volunteers, and apprentices.  Although the Rule affects all types of businesses and industries, employers that fall outside of the FTC’s jurisdiction – including banks and financial institutions, common and air carriers, and some non-profits – are not covered by this new Rule.

What is a Non-Compete Clause?

According to the FTC’s Compliance Guide, “a noncompete clause is a term or condition, often in an employment contract, that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment.”  This definition covers terms and conditions expressly saying that a worker can’t get another job with a competitor or start a business.  It also covers terms and conditions that require a worker to pay a penalty if they get a job with a competitor or start a business. The Rule also covers non-compete provisions in severance agreements.  The Rule prevents terms and conditions that aren’t labeled as non-competes, but are so restrictive that they effectively prevent a worker from getting a new job or starting a business.

Are There Exceptions?

According to §910.3 of the Rule, exceptions apply for a bona fide sale of business, causes of action relating to non-competes that expired prior to the effective date, and good faith beliefs that a non-compete agreement fell under an exception. During a business sale, the buyer can enter into a non-compete agreement for themselves, but cannot bind their future employees to it.  For causes of action that expire prior to the effective date, the Commission stated that retroactivity would not apply, and therefore the expired non-compete agreements would not be subject to penalty.  However, if the non-compete occurred prior to the effective date but has not expired, it cannot be enforced and a notice requirement must be met.  In addition, an individual who enters into a non-compete agreement under a good faith belief that an exception applies will not be penalized.  Further, the Rule does not apply to a franchisor-franchisee relationships.

For new non-compete agreements, an employer may not enter into a non-compete agreement with a senior executives.  However, if a non-compete agreement with a senior executive was in place prior to the enactment date, the non-compete agreement may be enforceable.  Importantly, the FTC estimates that less than one percent of workers fall under this exception.

What is a Senior Executive?

910.1 of the Rule defines a Senior Executive 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 preceding year; or

(ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; 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.

It further explains that a policy-making position is “a business entity’s president, chief executive officer or the equivalent, any other 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.”  Policy-making authority is “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.”  It does not include advising someone in this role.

How Does a Company Comply?

Companies can comply by not entering into any new non-compete agreements.  For existing agreements that will be invalid at the effective date, companies must provide notice to the workers affected by the Rule. The Rule contains strict provisions regarding such notices, and it is recommended that all employers with existing non-compete agreements prepare such notices in advance to be sent on the day the Rule goes into effect.

Questions About The FTC Final Rule on Independent Non-Compete Clauses? Call The Law Group Of Northwest Arkansas.

If you have any questions regarding the FTC Final Rule on Non-Compete Clauses, or if you would like assistance with the required worker notices, The Law Group of Northwest Arkansas PLLC can help. Contact The Law Group of Northwest Arkansas PLLC  to schedule a free, initial consultation. You can contact us by using our online contact form or calling 479-316-3760.