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FTC Votes to Ban Almost All Non-Competes

08 May

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Update Applicable to:Effective date
All employersThe rule will be effective 120 days after the date of publication on the Federal Register


What happened?

On April 23, 2024, the Federal Trade Commission (FTC) banned almost all non-competes from being used in employer-employee/independent contractor relationships and enforced the ones in place, except under limited circumstances.


What are the details?

According to FTC Chair Lina M. Khan: “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC’s recent rule renders existing noncompetes unenforceable for most workers after the effective date. However, senior executives (representing less than 0.75% of workers) can maintain their existing noncompetes. Employers are prohibited from entering or attempting to enforce new noncompetes, even if they involve senior executives. Additionally, employers must notify non-executive workers about the unenforceability of existing noncompetes. The FTC found that noncompetes negatively impact labor markets, innovation, and consumer prices; it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act.


Key Bites

The rule affects employers in the following:

  • Employers will not be able to enter non-compete clauses with workers (except for senior executives).
  • Employers can no longer enforce existing non-compete agreements (except for senior executives).
  • Employers must provide explicit notice to both current and former employees that their non-competes are no longer enforceable.
  • The rule defines “non-competition agreements” as “[any] term or condition of employment that prohibits a worker from, penalizing a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition (Section 910.1).
  • The Rule does not explicitly ban non-disclosure agreements, customer non-solicitation agreements, or employee non-solicit agreements. The FTC said those provisions are still valid so long as they do not have the effect of preventing someone from getting a job; the determination will be made on a case-by-case basis. 
  • The Rule takes precedence over state laws to the extent that they allow or authorize actions prohibited by the rule or conflict with its notice requirements.
  • The Rule defines “senior executives” as workers earning more than $151,164 annually and who are in policy-making positions.

Notice

Employers must provide notice to workers before the effective date regarding non-compete clauses under the FTC’s final rule:

  • Clear and Conspicuous Notice: give “clear and conspicuous” notice that identifies the person who entered the non-compete with the worker.
  • Format: The notice can be provided in digital format (such as email or text) or on paper. Oral notice is not sufficient.
  • Delivery Methods: Notice can be delivered by hand-delivery, mail to the worker’s last known street address, email, or text message.
  • Recipients: provide this notice to both current and former workers (especially former workers subject to active non-compete clauses as of the rule’s compliance date).
  • Exemption: Workers are exempt from the notice requirement if the employer has “no record” of their street address, email address, or mobile telephone number (according to law firm Fisher Phillips).


Effective date

The rule will be effective 120 days after the date of publication on the Federal Register. The final rule is scheduled to be published on 5/7/2024, which would estimate the effective date to be 9/4/2024. Employers can also visit the FTC Federal Register Page, and search for “Non-Compete Clause Rule” or visit the unpublished rule page below.


Conclusion

If the rule withstands legal challenges, employers will be prohibited from creating new noncompetes and enforcing existing ones, except for senior executives.

  • For the supporting legal arguments being made against the FTC noncompete rule.
  • Legal challenges have already been filed and more are expected.


Business Considerations

  • Employers should review and evaluate any existing noncompete agreements the company has in place and identify which employees are affected by these agreements.
  • Employers should understand the scope of the rule because most noncompetes will be unenforceable after the rule’s effective date. Ensure that your company does not enter into new noncompete agreements with non-executive employees.
  • Employers should notify employees (except senior executives) about the unenforceability of existing noncompetes (the rule is retroactive for non-senior executives) and provide clear information on how the rule impacts their rights and job mobility.
  • Employers should avoid entering new noncompete agreements with senior executives.
  • Employers should consult with an attorney to ensure compliance with the rule and provide an adequate update to any restrictive covenant, to make them compliant.
  • Employers should update their employment contracts and policies to comply with the FTC Rule.
  • Employers should adapt their talent management strategy, focusing on retention through a positive workplace culture rather than restrictive agreements, and encourage innovation and knowledge sharing among employees.


Source References


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This communication is intended solely for the purpose of conveying information. The present post might incorporate hyperlinks directing readers to websites managed by third-party entities. The inclusion of any links within this communication is meant to serve as points of reference and could encompass opinion articles from various law firms, articles from HR associations, official websites, news releases, and documents of government agencies, and other relevant third-party sources. Vensure has no authority over these external websites and bears no responsibility for their content. Furthermore, Vensure does not endorse the materials present on these websites. The contents of this communication should not be interpreted as legal advice or as a legal standpoint concerning specific facts or scenarios. Nor should it be deemed an exhaustive compilation of facts potentially pertinent to federal, state, or local laws. It is strongly advised that employers solicit legal guidance from an employment attorney when undertaking actions in response to any legal updates provided. This is due to the possibility of future alterations occurring in federal, state, and local laws, regulations, as well as the directives and guidelines issued by governing agencies. These changes may transpire at any given time, potentially rendering certain portions of the content within this update void or inaccurate.

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