Federal Trade Commission Issues Rule Limiting Non-Compete Clauses
August 2024
Number 36
On April 23, 2024, the Federal Trade Commission (FTC) issued its final Non-Compete Clause Rule (Rule) which bans employers within the FTC’s jurisdiction from entering into new non-compete clauses (non-competes) with workers. Additionally, non-competes entered into before the effective date of this Rule will be unenforceable, except for non-competes entered into with senior executives which will remain in force.
The Rule will go into effect September 4, 2024.
Details of Rule Limiting Non-Compete Clauses
The Rule provides that it is an unfair method of competition and a violation of the law for employers to: (1) enter into or attempt to enter into non-competes; (2) enforce or attempt to enforce non-competes; or (3) represent that a worker is subject to a non-compete clause. For senior executives, this only applies to non-competes entered into after the effective date of the Rule. A senior executive means a worker who was in a policy-making position and receives a total annual compensation of at least $151,164.
The Rule defines “non-compete clause” as a term or condition of employment that either 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 employer where such work would begin after the conclusion of the current employment, or (2) operating a business in the United States after the conclusion of the current employment. There are also several limitations and exceptions to the Rule, including but not limited to when there is a bona fide sale of a business entity.
In addition, employers will be required, no later than the Rule’s effective date, to provide written notice to workers with existing non-competes that are now prohibited, that their non-competes are no longer enforceable. There are specific requirements as to what must be in the notice as well as how it is delivered, and the Rule provides model language for such notice.
Relation to State Laws
On January 1, 2024, California’s Assembly Bill 1076 and Senate Bill 699 became effective, further solidifying the unenforceability of employment-related non-competes. The Rule provides that states may continue to enforce laws restricting non-competes that do not conflict with the Rule, regardless of state laws that are narrower than the Rule. As such, California employers should familiarize themselves with both this federal Rule and California laws.
Takeaways
Employers should proceed with caution when entering into agreements with workers when the agreement functions to prevent a worker from seeking or accepting post-employment work. Additionally, employers should consult legal counsel to determine whether there is an applicable exception to the Rule, based on their individual circumstances. Employers should also evaluate whether they need to notify any employees that their current non-competes are no longer enforceable.
If you have any questions about the FTC’s Rule on non-competes, please contact the authors of this Client News Brief or any attorney at one of our eight offices located statewide. You can also subscribe to our podcasts, follow us on Facebook, Twitter and LinkedIn or download our mobile app.
Number 36
On April 23, 2024, the Federal Trade Commission (FTC) issued its final Non-Compete Clause Rule (Rule) which bans employers within the FTC’s jurisdiction from entering into new non-compete clauses (non-competes) with workers. Additionally, non-competes entered into before the effective date of this Rule will be unenforceable, except for non-competes entered into with senior executives which will remain in force.
The Rule will go into effect September 4, 2024.
Details of Rule Limiting Non-Compete Clauses
The Rule provides that it is an unfair method of competition and a violation of the law for employers to: (1) enter into or attempt to enter into non-competes; (2) enforce or attempt to enforce non-competes; or (3) represent that a worker is subject to a non-compete clause. For senior executives, this only applies to non-competes entered into after the effective date of the Rule. A senior executive means a worker who was in a policy-making position and receives a total annual compensation of at least $151,164.
The Rule defines “non-compete clause” as a term or condition of employment that either 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 employer where such work would begin after the conclusion of the current employment, or (2) operating a business in the United States after the conclusion of the current employment. There are also several limitations and exceptions to the Rule, including but not limited to when there is a bona fide sale of a business entity.
In addition, employers will be required, no later than the Rule’s effective date, to provide written notice to workers with existing non-competes that are now prohibited, that their non-competes are no longer enforceable. There are specific requirements as to what must be in the notice as well as how it is delivered, and the Rule provides model language for such notice.
Relation to State Laws
On January 1, 2024, California’s Assembly Bill 1076 and Senate Bill 699 became effective, further solidifying the unenforceability of employment-related non-competes. The Rule provides that states may continue to enforce laws restricting non-competes that do not conflict with the Rule, regardless of state laws that are narrower than the Rule. As such, California employers should familiarize themselves with both this federal Rule and California laws.
Takeaways
Employers should proceed with caution when entering into agreements with workers when the agreement functions to prevent a worker from seeking or accepting post-employment work. Additionally, employers should consult legal counsel to determine whether there is an applicable exception to the Rule, based on their individual circumstances. Employers should also evaluate whether they need to notify any employees that their current non-competes are no longer enforceable.
If you have any questions about the FTC’s Rule on non-competes, please contact the authors of this Client News Brief or any attorney at one of our eight offices located statewide. You can also subscribe to our podcasts, follow us on Facebook, Twitter and LinkedIn or download our mobile app.
As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.
