FTC Bans Non-compete Clauses with Workers

On April 23, 2024, the Federal Trade Commission (FTC) finalized a new rule to prohibit anyone from enforcing a non-compete clause against workers. The new rule prohibits anyone from entering into a non-compete clause with workers on or after the effective date and prohibits enforcing existing non-compete clauses with workers other than senior executives on or after the effective date. This alert provides a brief summary of the new rule; this summary is only intended to make the reader aware of some of the provisions of the new rule and does not constitute legal advice.

What is a non-compete clause?

Under the FTC's new rule, a "non-compete clause" means a term or condition of employment that prohibits, penalizes, or prevents a worker from seeking or accepting work in the United States with a different person when the work would begin after the conclusion of the employment that includes the term or condition, or operating a business in the United States after the conclusion of the employment that includes the term or condition.

The new rule states that a term or condition includes but is not limited to a contractual term or workplace policy, whether written or oral.

Who is a senior executive?

Under the FTC's new rule, a "senior executive" is a worker who was in a policy-making position and received from a person for the employment: total compensation of at least $151,164 in the preceding year, total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year, or 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.

The new rule states that total annual compensation is based on the worker's earnings over the preceding year, which may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during that 52-week period, but does not include payments for medical insurance, payments for life insurance, contributions to retirement plans, and the cost of other similar fringe benefits.

What affirmative duties does the imposer of a non-compete clause have?

The new rule requires that a person that has entered into a non-compete clause with a worker who is not a senior executive must provide notice to the worker by the effective date that "the worker's non-compete clause will not be, and cannot legally be, enforced against the worker." The person must deliver the notice by hand to the worker, by mail to the worker's personal address, by email to an email address belonging to the worker, or by text message to a mobile telephone number belonging to the worker. There is an exception if a person does not have the worker's address, email, or mobile telephone number on record. While there is a model form of notice included in the new rule, it may be advisable to use a more carefully drafted form. 

Are there exceptions to the proposed rule?

The new rule has three exceptions. First, the bona fide sale of business exception allows non-compete clauses when entered into by a person "pursuant to a bona fide sale of a business entity, of the person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets." Second, this new rule does not apply to a cause of action related to a non-compete clause that accrued prior to the effective date of the new rule. Third, the good faith exception states that it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause where the person has a good faith basis to believe that the new rule does not apply.

What's next?

The FTC's new rule will not be effective until 120 days after the rule has been published in the Federal Register. As of today, there have been numerous legal challenges filed in response to the new rule. With the recent filings of these legal challenges, it is unclear whether the effective date of the rule will be delayed. The attorneys here at Stone Pigman are following the latest developments and expect to provide an update in the future.