April 25, 2024: Written by Erik Derr, Esq. and Christopher Leddy, Esq.
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule the (the “FTC Rule”) purporting to ban non-compete agreements on a nationwide basis. Effective 120 days after publication in the Federal Register, the Rule serves to ban contractual agreements with all workers and their employers.
What does this mean for employers? In the short term: nothing.
Historically employers have utilized non-compete clauses or agreements as part of their employment arrangements with new employees. Non-competes traditionally serve the legitimate business purpose of protecting business contacts, trade secrets, or other proprietary information by preventing workers from accepting a position in the same general field, title, or territory as the worker’s current employment.
The FTC Rule, however, provides that non-compete agreements present “an unfair method of competition” and would require employers to rescind such existing agreements (with a small exception for “senior executives” (those workers earning more than $151,164 annually who are also in a “policy-making position”)). The FTC Rule retroactively applies to existing agreements and would require employers to issue notice to employees that such agreements can no longer be enforced. As an “accommodation,” the FTC Rule includes “model” notice language employers can provide to impacted employees.
The FTC Rule is very broad in that it defines “non-compete clause” as one “that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting employment that would violate the term or condition. What does it mean to “function to prevent a worker” from seeking or accepting employment? Is this an objective or subjective standard?
The aforementioned questions do not begin to reveal the tip of the iceberg of the totality of issues raised by the FTC Rule. Among them, and as detractors of the FTC Rule will point out, is the FTC’s authority to even set forth such a rule. This is because state law typically governs employment contracts, and stripping the states of jurisdiction to do so presents a significant constitutional issue.
So what exactly should employers be doing in the face of the FTC Rule?
In the near term, and to the extent they are still permitted under relevant state law, existing non-competes are not going anywhere soon (or at least for 120 days). This is because the FTC Rule faces significant and well-funded legal challenges from a myriad of trade organizations who vehemently oppose the FTC Rule. Legal challenges, and litigation around the FTC Rule, could mean a delay of years, not days, before the FTC Rule, or something similar, is ever actually implemented.
While these legal challenges are ongoing, it may be smart to review existing employment contracts and consider whether traditionally used non-competes are still an instrumental part of business operations. If not, revisions to these agreements or future agreements narrowing the scope of what is prohibited (if anything is prohibited at all), may ease the eventual transition. A tiered approach, or use of non-solicits or no-contact lists may protect employer interests and satisfy these national and local restrictions. However, employers are cautioned to keep any such restrictions
“reasonable” in time, geography, and scope, and limited only as to what is absolutely necessary so as to avoid entering into an agreement that is overly broad or a “de facto” non-compete in violation of the FTC Rule (and a growing number of state restrictions)
Be sure to follow along with Becker’s Staffing Practice for more insights on the FTC Rule, and any other regulations, in this changing and challenging legislative environment.