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On Tuesday, April 23, 2024, a ban of nearly all noncompete agreements was enacted by the Federal Trade Commission (FTC). The ban is scheduled to take effect in Late August or early September, 120 days after the final rule, which includes almost 600 pages of content, is published in the Federal Register. This final rule is extremely close to the proposed noncompete ban put forth for public review and comment by the FTC nearly 15 months ago. The complete FTC rule can be found here.
The final rule will stop most private, for-profit companies and employers from enforcing noncompete agreements. However, there is an exception for existing noncompete agreements with a senior executive. Please note that the definition of “senior executive” appears to be very narrow. In short, this rule does not ban existing noncompete agreements with senior executives, but, after the effective date, new noncompete agreements with senior executives will be banned. Another exception exists for noncompete agreements with a seller in connection with the sale of a business or the sale of a seller’s interest in a business.
The rule defines a “senior executive” as a worker in a policy-making position and who received compensation of at least $151,164 in the preceding year. A “policy-making position” means “a business entity’s president, chief executive officer, or equivalent, and any other officer of a business entity who has policy-making authority.” Again, this rule does not invalidate existing noncompete clauses with senior executives but does prohibit them on a forward-looking basis.
Not only does the rule effectively ban noncompete agreements moving forward, existing noncompete agreements with all current and former workers become unenforceable upon the effective date of the final rule. Employers are required to provide notice to these employees, current and former, notifying them that their noncompete agreements are unenforceable. The final rule provides model language for this notice. Again, the final rule only requires that employers provide notice that the noncompete will not be enforced. The model notice language can be found here. This is a safe harbor, model notice, but it is likely most employers will want to consider alternative language.
The rule broadly defines a noncompete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Other forms of restrictive covenants may also be utilized to protect an employer’s business, as long as the restrictive covenant does not “penalize a worker” or “function to prevent a worker” from working for a different employer. Confidentiality agreements, nondisclosure agreements and non-solicitation agreements are arguably permissible. However, non-solicitation agreements that are so broad as to have the same effect as a noncompete would likely be prohibited by the FTC rule.
As expected, lawsuits challenging this new rule have been filed fast and furiously from a variety of directions, most notably the United States Chamber of Commerce. As a result, the future of this rule is murky, at best, but that murkiness does not allow employers the luxury to take a wait and see approach to its possible effects. Employers falling under this rule should begin to plan how to adapt to this rule moving forward.
At this point, it would be wise to:
- Determine if this ban applies to your company or organization. The FTC confirmed that this final rule does not apply to companies and organizations that are not subject to the FTC Act, including certain banks and nonprofit entities. However, the FTC also stated that even if an entity is nonprofit for tax purposes, if it is a profit-making enterprise or organized for the profit of its members – like a healthcare system – the rule may still be applicable to those entities.
- Consider placing your existing Senior Executive(s) under a noncompete agreement. While noncompete agreements entered after the effective date would be unenforceable for all workers, existing noncompete agreements are enforceable for workers who are senior executives. This provides an opportunity to enter enforceable noncompete agreements with their senior executives.
- Take inventory of all employee covenant agreements and employment agreements containing covenants and determine (1) if notice (as described above) must be sent to those current and former employees and (2) if there are any other steps which can be taken to protect the organization such as non-solicitation agreements, confidentiality/non-disclosure agreements, etc.
This is just a summary of a rather lengthy rule with sweeping changes and serious consequences for employers across the country. If you have any questions about the FTC’s final rule effectively banning noncompete agreements in most circumstances, and it may affect your organization, please contact Michael Bogdan or any member of the KWGD Labor and Employment Practice Group.
Michael J. Bogdan, Esq.
330-497-0700
mbogdan@kwgd.com