Last year, OlenderFeldman LLP notified its clients of the Federal Trade Commission’s (FTC) Notice of Proposed Rulemaking, which it released on January 5, 2023, seeking to ban employers from enforcing or entering into employment agreements that contain restrictions or limitations on the ability of employees to compete following the end of an employment relationship, subject to limited exceptions as detailed below.
On April 23, 2024, the FTC issued the final rule banning and invalidating nearly all non-competes (“Non-Compete Rule”). The Non-Compete Rule will impact most businesses in the United States that use non-compete agreements to protect their trade secrets, confidential business information, and other important interests. The Non-Compete Rule defines a "non-compete" agreement as any employment term or contractual condition that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a new business after leaving their employment.
OlenderFeldman LLP has prepared this FAQ to address the most pertinent issues and implications relating to the FTC’s issuance of the Non-Compete Rule.
Q. What is the FTC’s Proposed Non-Compete Rule?
A. The FTC’s proposed Non-Compete Rule would ban employers from imposing non-compete agreements on all workers regardless of whether they are full-time, part-time, or independent contractors. The Non-Compete Rule considers all non-competes to be in violation of Section 5 of the FTC Act. The Non-Compete Rule seeks to promote fair competition and ensuring that workers have the freedom to seek employment opportunities without restrictions from their previous employers. Under the Non-Compete Rule, employers are prohibited from entering into any agreement intended to bar workers from being able to compete with their employer, establishing a nationwide comprehensive “non-compete ban” to invalidate existing and new non-competes, subject to limited exceptions.
The Non-Compete Rule applies to all workers, including full-time and part-time employees, independent contractors, interns, volunteers, apprentices, and sole proprietors who provide services to clients or customers.
Q. What are the Exceptions under the Non-Compete Rule?
A. The proposed Non-Compete Rule includes several important exceptions:
Non-Compete Agreements Attendant to the Sale of a Business: The Non-Compete Rule does not apply to non-competes entered into as a result of 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.” The seller can agree to a non-compete individually, but not for any of the employees of the business.
Senior Executives: The Non-Compete Rule does not apply to existing non-compete agreements with senior executives. The Non-Compete Rule defines the term “senior executive” as workers earning more than $151,164 annually who are in a “policy-making position.” The FTC estimates that fewer than 1% of workers are estimated to be senior executives under the proposed rule. New non-compete agreements with senior executives are prohibited after the effective date.
Existing Causes of Action: The Non-Compete Rule does not apply to bar any cause of action in legal disputes related to a non-compete clause that existed prior to the effective date.
Other Restrictive Agreements: Non-solicitation, non-recruitment, and non-disclosure agreements that effectively restrict a worker from seeking other employment or starting a business are also prohibited, regardless of the classification, if the agreement effectively functions as a de facto non-compete (i.e. any contractual provision that has the “effect” of prohibiting a worker from seeking/accepting employment or operating a business after the conclusion of the worker’s current employment), and these agreements are analyzed on a case-by-case basis. Even if the proposed Non-Compete Rule is implemented, employers can still protect their business interests by including confidentiality provisions and other restrictive agreements – as long as they do not create a de facto non-compete.
For all other workers, existing non-compete agreements will be unenforceable as of the effective date of the Non-Compete Rule (as discussed below) and employers are required to inform workers that they are no longer bound by such non-compete clauses.
Q. When will the Non-Compete Rule go into Effect?
A. The FTC published the Non-Compete Rule in the Federal Register on May 7, 2024, and it is expected to take effect as of September 4, 2024. Since the announcement of the Non-Compete Rule, there have been several major lawsuits filed raising legal challenges that could delay the effective date and a court could invalidate the rule altogether.
Q. What Recommended Actions Should Employers Take Now?
A. The simple answer is to wait and see if the Non-Compete Rule is ultimately upheld and/or modified. We believe the rule will not be implemented in its present form. If the rule is upheld as it stands, OlenderFeldman LLP will provide an update with the notice requirements for those current and former workers who are not senior executives that their non-competes are unenforceable, and will provide guidance on recommended changes to non-compete policies to make them compliant with the FTC Rule.
Q. Have there been any Legal Challenges to the Implementation of the Non-Compete Rule since the FTC’s Announcement?
A. The Non-Compete Rule is currently being challenged in several lawsuits seeking, among other things, a temporary stay of the rule's September 4, 2024 effective date. In the case filed in the U.S. District Court for the Northern District of Texas, the court has indicated it will rule on whether to issue a stay (i.e. a temporary pause) of the Non-Compete Rule by July 3, 2024, and OlenderFeldman LLP will provide further updates as they become available.
For more information on compliance, please contact the OlenderFeldman Employment Practices Group here.
