In January of 2023, Bowditch alerted clients that the Federal Trade Commission (\u201cFTC\u201d) was proposing a sweeping new rule that would ban the use of virtually all non-compete agreements and have a seismic effect on employment relationships throughout the United States. On Tuesday, April 23, 2024, after receiving over 26,000 comments, the FTC voted (3-2) to finalize \u201cThe Non-Compete Clause Rule\u201d (the \u201cRule\u201d), which contains only a few modifications to the proposed rule.<\/p>\n
As anticipated, the final Rule bans most employers from using post-employment non-compete agreements in nearly all contexts. Additionally, as the FTC\u2019s accompanying commentary acknowledges, the Rule will invalidate nearly 30 million existing agreements, impacting roughly one fifth of the entire United States workforce. The impact on United States employers\u2019 business operations will, indeed, be quite significant.<\/p>\n
The Rule provides that it is an unfair method of competition, in violation of section 5 of the Federal Trade Commission Act, to enter a new non-compete agreement with any worker, including senior executives, on or after the effective date of the Rule.<\/p>\n
The prohibition applies, with almost no exceptions (see the limits below), to new non-compete agreements with any person who performs work, whether paid or unpaid, regardless of classification as an employee, volunteer, independent contractor, or other designation.<\/p>\n
The Rule also applies to prohibit all previously entered non-compete agreements with two narrow exceptions.<\/p>\n
First, the Rule permits continued enforcement of previously entered non-compete agreements against workers who qualify as \u201csenior executives.\u201d Under the Rule, workers must meet both an income test and be in a \u201cpolicy-making position\u201d to qualify as a senior executive.<\/p>\n
Second, the Rule also permits causes of action related to non-compete agreements that accrued before the effective date.<\/p>\n
The Rule defines the term \u201cnon-compete clause\u201d to apply not only to agreements that overtly prohibit a worker from engaging in work or starting a business after their employment has ended, but also to those that \u201cfunction to prevent\u201d a worker from, or \u201cpenalize\u201d a worker for, engaging in work or starting a business after the end of their employment.<\/p>\n
The Rule\u2019s definition does not appear to cover most reasonably tailored non-solicitation agreements and non-disclosure agreements. In response to comments, the FTC declined to explicitly include such agreements within the definition of prohibited agreements and stated that \u201crestrictive employment agreements other than non-competes\u2014such as NDAs, non-solicitation agreements, and TRAPs\u2014do not by their terms or necessarily in their effect prevent a worker from seeking or accepting work with a person or operating a business after the worker leaves their job.\u201d However, the FTC acknowledged decisions regarding whether such agreements fall within the \u201cfunctions to prevent\u201d category must be made on \u201ccase-by-case basis\u201d and will depend on \u201cthe facts and circumstances of particular covenants and the surrounding market context.\u201d As a result, any such alternative post-employment restrictions will need be drafted carefully to avoid falling into the prohibited \u201cfunctions to prevent\u201d category.<\/p>\n
The Rule mandates that any person with an existing non-compete agreement with a worker, other than a \u201csenior executive,\u201d provide written notice informing the worker that the non-compete provision is unenforceable. The notice must be sent to all current and former workers, other than \u201csenior executives,\u201d who are subject to existing non-compete provisions. The Rule provides \u201csafe harbor\u201d model language for the notice and a limited exception for former workers for whom no contact information is available.<\/p>\n