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The FTC Rule Banning Non-Competes: What You Need to Know

Contributed by Jenna Fogleman Saifi.

On April 23, 2024, the Federal Trade Commission (FTC) announced a final rule with a broad ban on non-competition agreements between workers and employers. The FTC published the Final Non-Compete Clause Rule on May 7, 2024, with an effective date of September 4, 2024.

Here is a snippet of what you need to know about the rule:

  1. The ban is retroactive and applies to all contracts for workers who are not “senior executives.”
  2. The rule bans all new non-competition agreements with employees, including senior executives, after the rule’s effective date of September 4.
  3. A “worker” includes employees, independent contractors, externs, interns, volunteers, apprentices, or a sole proprietor that provides services to a person.
  4. The ban does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.
  5. The rule bans any clauses that “function to prevent” future employment, not just a non-competition clause. While the rule does not categorically prohibit other types of restrictive employment agreements such as non-solicitation provision, employee non-solicitation provision, training repayment provisions, or non-disclosure agreements, if the terms of those provisions prohibit a worker or penalize a worker for seeking or accepting other work, they may meet the “function to prevent” definition.

There is a two-part test for what constitutes an agreement with a “senior executive,” compensation and job duties.

  1. The compensation test requires at least $151,164 in total annual compensation in the preceding year (or annualized if employed for only a partial year).
  2. The job duties test considers the duties of the worker, not the title. It looks for officers who have policy-making authority.

If you are an employer, you are probably wondering what compliance looks like.

First, Employers are required to notify such workers bound by existing non-competes that they will no longer be enforcing them. The FTC has provided model language that employers can use to notify workers:

Second, existing non-competition agreements for senior executives can remain in force. However, the ban prohibits employers from entering into or attempting to enforce any new non-competes, especially those involve senior executives.

How did this rule come about?

According to the FTC, noncompete clauses “keep wages low, suppress new ideas, and rob the American economy of dynamism.” As such, the FTC anticipates the following to result from the new ban:

  • An increase in new business formation of 2.7% each year.
  • The creation of more than 8,500 additional jobs each year.
  • The increase in the estimated earnings for the average worker by an additional $524 each year.
  • A decrease in health care costs by an estimated $194 billion over the next decade.

What are the consequences?

According to the FTC’s official statement of the ban, the anticipated one-time cost in administrative and legal fees for compliance is an estimated total of $2.1 – $3.7 billion.

Yet, expense is not the only issue. Some employers must consider the ban’s reach on nondisclosure agreements (NDAs). While NDAs are not originally within scope of the ban, broad or abusive NDAs will fall within the definition if found to prevent competition. Similarly, the FTC claims that the ban does not apply to entities that are not subject to the FTC Act (i.e., nonprofits). However, even if registered as nonprofit for tax purposes, the ban will apply to an entity if is found to be a profit-making enterprise or organized for the profit of its members. Also, because the ban also preempts all state laws, it is likely to create uncertainty in state legislatures that have had domain over non-competes for over one hundred years.

Less than 24 hours after the ban was issued, the U.S. Chamber of Commerce filed suit in the Eastern District of Texas seeking declaratory judgement and injunction that would prevent the implementation of the ban. A ruling on this suit is expected July 3rd.

If an employer fails to comply with the rules set forth by the ban, the FTC could commence an administrative proceeding or seek a district court injunction. Such actions would allow the FTC to force employers to follow the ban. In addition, there is an email and mail address provided by the FTC to directly report suspected violations of the rule to the “Bureau of Competition.”

If you have any questions about how this may impact your business, need assistance in preparing for the changes, or want more information on this Rule, please contact us at 479-621-0006.

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