Key Takeaways
On April 23, 2024, the Federal Trade Commission (FTC) voted to finalize a rule prohibiting employers from entering or enforcing non-compete clauses with U.S. workers. Under the rule, “worker” is defined as an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides services. The rule bans traditional non-competes and other forms of restrictive covenants, which effectively preclude competition. It is set to go into effect on September 4, 2024. However, the rule has already been challenged in court.
The ban applies nationwide and offers only very limited exceptions for:
- existing non-competes with senior executives which were entered into before the effective date of the proposed rule (senior executives are defined as workers who are in policy-making positions and earn more than $151,164 annually); and
- non-competes related to the “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.” A “bona fide” sale is one made in good faith and not for the purpose of evading the final rule.
Non-disclosure, as well as customer and employee non-solicitation agreements, are still permitted. However, they should always be drafted narrowly to protect the employer’s legitimate business interests and comply with applicable state laws.
What Should You Do
Before the effective date of the rule, employers will need to provide clear and conspicuous notice to each worker (including independent contractor, extern, intern, or apprentice) who is subject to a non-compete. Since there are already two pending lawsuits in Texas against the FTC, wait to send these notices as the enforcement of the rule may be delayed or even prevented.
Although employers are not legally required to make any immediate changes in their non-compete practices to comply with the new rule, many states, including Washington, D.C. and Maryland have already imposed significant limitations on non-competes. Some, like California, have already banned them. Virginia has prohibited employers from entering into, enforcing or threatening to enforce non-compete agreements with “low wage employees.”
Regardless of the effectiveness of the new rule, you should have existing non-competes reviewed by counsel to determine if they are still enforceable.
