You may have heard rumblings that the Federal Trade Commission (FTC) has banned non-compete clauses nationwide. We’re here to give you the details of the ban and the latest developments as of the date of this article.
The FTC recently issued a Final Rule which, unless invalidated in court, will have dramatic and lasting effects on the way employers protect their business in their employment and independent contractor agreements.
The Final Rule, issued on April 23, 2024, and effective September 4, 2024 (the Effective Date), provides that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for anyone to enter into an agreement that subjects a worker to a non-compete clause, or, in most cases, enforce an existing non-compete clause against a worker.
The rule defines “non-compete clause” as a term or condition of employment that prohibits, penalizes, 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; or (2) operating a business in the United States after the conclusion of the employment.[1]
Employers are also prohibited from representing in any manner that its workers are subject to a non-compete clause and are required to proactively provide notice to its workers who are bound by existing non-competes that the clauses will not be enforced against them, no later than the Effective Date.
There is an exception to the Final Rule’s prohibition on enforcing existing non-compete clauses when it comes to senior executives. Senior executives are defined as workers making at least an annual salary of $151,164 who hold policy-making positions. Senior executives can continue to be subject to existing non-competes after the Effective Date. To be clear, though, employers will be prohibited from entering into new non-compete agreements with these senior executives.
The Final Rule does not apply to non-competes entered into pursuant to a sale of a business, nor does it apply to pending litigation related to non-compete clauses initiated prior to the Effective Date.
The Final Rule is currently being challenged in courts across the country, which may result in the delayed implementation or even voiding of the Rule. Employers should prepare as if it will go into effect on the Effective Date, but also monitor the situation as these legal challenges move through the courts.
As our firm and others have long anticipated this ban on non-competes, and given the historical challenges of enforcing them nationally and in Virginia, we have consistently advised clients that a well-drafted, targeted “non-solicitation of customers and prospects” clause is often the best bet. However, if you have been relying on non-competes to protect your business and are concerned about what to do next, or if you would like our assistance in preparing for a compliant transition as the Effective Date approaches, please contact us.
[1] https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf