FTC Bans Non-compete Clauses
Here are six FTC non-compete provisions
In a previously article on non-competes entitled “Are Non-Compete Provisions Still Enforceable”, there was a reference to a rule published for comment in January 2023 by the U.S. Federal Trade Commission.
The proposed rule would essentially ban nationwide the use of non-compete provisions to prevent employees from becoming employed by competitive enterprises.
Recently, on April 23, 2024, after receiving and reviewing over 26,000 comments concerning the proposed rule, the FTC formally enacted the non-compete ban, which was published in the Federal Register on May 7, 2024. The rule is intended to preempt state law so non-competes sanctioned by state law inconsistent with the FTC rule would no longer be enforceable.
The rule is not due to come into effect until September 4, 2024, and is already being challenged in the courts. Two cases have been filed in the Texas U.S. Federal District Court objecting to the rule on several constitutional grounds but, so far, there has been no stay of enforcement.
The FTC ban on non-compete provisions is of such potential significance for employers that it is worth monitoring and preparing for. I provide, below, only the highlights:
The FTC ban on non-compete provisions are:
1. Rank and File Employees, Executives and Independent Contractors will be Covered
The FTC Rule will ban the use of non-compete provisions with respect to independent contractors and employees. With respect to “senior executives,” who are already bound by a non-compete provision, only those earning over $151,164 per year and in a policy making position will continue to be bound. Non-competes affecting “senior executives” that do not meet this criteria shall no longer be enforceable.
2. Exceptions
- The FTC rule will not apply to certain industries, such as banks, savings and loans, credit unions, common carriers, air carriers, foreign air carriers, or cover persons subject to the Packers and Stockyard Acts.
- The FTC rule shall also not apply to non-for-profit organizations or abrogate non-competes entered into pursuant to a bonafide sale of a business.
- The FTC rule will not prohibit employers already in a litigation with an employee concerning an alleged violation of a non-compete from enforcing such provisions.
- Employers who, in good faith, believe that the rule is not applicable, such as when a bonafide trade secret is at issue, also may be exempted from the rule.
Finally, non-competes associated with affording employees “garden leave,” would also not be covered by the ban. Under garden leave provisions, an employee is placed on leave pursuant to a termination provision but continues to receive their full salary and benefits during the garden leave term.
3. Notice to Employees
Not only are employers prohibited from including non-compete provisions in their contracts, but, because the law applies retroactively to contracts predating the effective date of the rule, the FTC requires that employers notify current and former employees who may be bound by non-competes that such provisions are no longer enforceable.
The employer would need to provide written notice to each affected employee by the effective date of the rule. Notice would need to be mailed or hand delivered to the employee at their last known address or emailed or texted to them.
4. Non-Disclosure and Non-Solicitation Provisions
The FTC Rule does not explicitly ban the use of non-disclosure and non-solicit provisions but indicates that they may be prohibited if they are intended to function in the manner of a non-compete. According to the rule, where a non-disclosure or non-solicit spans “such a large scope of information that they function to prevent workers from seeking accepting other work or starting a business after they leave their job,” such provisions may be prohibited.
5. Moonlighting
Because the FTC rule only applies to post employment non-competes, it does not prohibit an employer from imposing moonlighting policies that would prohibit an employee from working for a competitor during the term of employment.
6. Court Challenges
What is the likelihood that the FTC Rule banning non-competes will be stayed prior to its effective date? Constitutional Law experts are generally critical of the FTC rule, opining that its enactment exceeds the FTC’s authority. Be that as it may, until the enforcement of the rule is stayed it is scheduled to go into effect.
The Take Away:
- The FTC’s ban of non-compete provisions is due to come into force on September 4, 2024. The rule purports to ban almost all post-employment non-compete provisions. The rule has been challenged in the courts but has not yet been stayed.
- Employers should monitor, to the extent possible, court challenges made to the rule but should also prepare for its implementation by compiling a list of employees that will need to be notified concerning the unenforceability of the non-compete provisions that purportedly bind them.
- As previously noted in my earlier article, even if the FTC rule is successfully challenged, the trend, even at the state level, is to prohibit, if not to significantly restrict, the application of such provisions. Before framing a non-compete clause to be included in an employment or service agreement, employers are advised to carefully consider the interests they need to protect and to confer with legal counsel.
Related content:
Are Non-Compete Provisions Still Enforceable? [Part 1]
