Legal Alert: The FTC’s Non-Compete Clause Rule: What You Need to Know
Authored by Gammage & Burnham attorneys Asha Devineni and Rick Mahrle.
On April 23, 2024, the Federal Trade Commission (FTC) passed the Non-Compete Clause Rule which will impact employment agreements once it goes into effect. The rule, as passed, would prohibit all non-compete clauses in employment agreements.
There are two exceptions: (1) non-competes in the sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets and (2) non-competes that are already in place with senior executives. A business entity includes a partnership, corporation, association, limited liability company, or other legal entity, or a division or subsidiary thereof.
Although the Final Rule will theoretically become effective 120 days after being published, it will be subjected to considerable judicial scrutiny, which may result in the Final Rule not going into effect for many months or years.
The Final Rule prohibits employers from mandating non-compete clauses for many categories of workers, including employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service and from engaging in unfair methods of competition. Employers may not enter into non-competes, enforce non-competes, or represent that the worker is subject to a non-compete.
A non-compete agreement is any term or condition of employment that prohibits, penalizes, or prevents a worker from seeking/accepting employment with a different person, or operating a business, after the worker’s employment concludes. The Final Rule’s definition of non-competes is limited to the U.S., meaning the prohibition does not apply if the non-competes restrict work outside the U.S. or starting a business outside the U.S.
Employers will still be able to enforce existing non-competes with senior executives (a worker in a policymaking position who earned at least $151,164 in the preceding year). Examples of senior executives include presidents, chief executive officers, vice-presidents and other officers with policymaking authority. Employers may not enter into new non-competes, enforce non-competes entered into after the Final Rule’s effective date, or represent that a senior executive is subject to a non-compete if it was entered into after the effective date. This means that existing non-competes with senior executives are still enforceable if they otherwise meet the requirements of being reasonable in geographic scope and are not too long.
Finally, once the rule goes into effect, employers have to provide workers with clear and conspicuous notice that non-competes will not be enforced against them in the future.
Have questions about how this may affect you or your business? Contact Rick Mahrle (602-256-4443) or Gina Carrillo (602-256-4451).