The Federal Trade Commission’s recent final rule marks a significant shift in noncompete clause policy, aiming to enhance labor mobility and competition across various industries. The rule mandates the cessation of entering and enforcing noncompete agreements with all workers, with specific provisions for senior executives and business sales. Here are the key components of the final rule and suggestions on how business owners can respond to the upcoming changes.
Key Provisions of the FTC’s Noncompete Ban
Scope
The Federal Trade Commission’s ban on noncompete agreements, which will be codified in the Federal Register as 16 CFR Part 910 (the “Rule”), applies to all workers with limited exceptions for senior executives and noncompetition agreements that are implemented to protect a business sale.
Definitions
- Senior Executives are defined as workers in policymaking positions with compensation exceeding $151,164.
- Workers in a policymaking position are typically the officers of the employer, such as the employer’s, president, chief executive officer, treasurer, among other leadership positions.
Rule
The new Rule prohibits all persons and business entities from:
- entering noncompete agreements,
- enforcing noncompete agreements, and
- communicating to a worker that he or she is subject to a non-compete agreement.
Since the term “worker” is broadly defined, the Rule applies to independent contractors and, in the future, senior executives.
Exceptions
- Existing Noncompete Agreements with Senior Executives: Existing noncompete agreements between senior executives and their employers will be allowed to remain in effect. However, after the Rule becomes effective, new noncompete agreements with senior executives will be banned as well.
- Business Sales: Recognizing the unique nature of business acquisitions, the FTC has exempted noncompete clauses that are integral to the sale of a business from the Rule, allowing new owners to protect their investment.
Effective Date of the Rule
The Rule will go into effect 120 days after the Rule is published in the Federal Register. Publication of the Rule has not happened yet, but the FTC anticipates that the effective date will occur in early September of 2024. We will continue to monitor existing legal challenges to see if there will be a delay on the effective date.
Legal Requirements and Employer Compliance
Based on FTC guidance for small businesses, there are three steps we suggest taking to promote compliance with the new Rule:
- Step 1: Do not include noncompete clauses in future employment contracts and paperwork;
- Step 2: Provide written notice to current and former workers subject to a noncompete that the noncompete is no longer enforceable; and
- Step 3: Refrain from enforcing exiting noncompete agreements (but continue enforcement of existing noncompete agreements with senior executives).
Step 2 above is a requirement under the Rule. Employers must provide clear and conspicuous notice to non-senior executive workers that their noncompete clauses will no longer be enforceable. The notice must be given via direct communication methods, such as email, text, or paper delivery. Employers are also advised to retain records of these notifications to comply with the Rule’s transparency requirements. We are available to assist with preparing legal notices to the affected workers.
Implications for Employers and Strategic Adaptations
Impact on Talent Management
The elimination of noncompete agreements for non-senior employees could reshape the landscape of talent retention and acquisition. Employers will need to explore alternative strategies such as enhancing workplace culture and offering competitive compensation and career development opportunities to retain top talent. The new Rule will also provide a unique opportunity to employers to bolster their workforce with competent employees in the industry who are currently working for a competitor. Employers who are competitive with worker compensation and opportunities will be in a position to gain a competitive advantage in labor talent.
Legal and Contractual Adjustments
- Strengthening NDAs and Non-Solicitation Agreements: With the restriction on noncompetes, the importance of nondisclosure and non-solicitation agreements will escalate. Employers should ensure these documents are robust and tailored to protect proprietary information and effectively prevent workers who leave from poaching clients and staff.
- Revising Employment Contracts: Over the next few years, the court cases and FTC rulings may tailor or clarify the extent of the new Rule, which will provide additional guidance for crafting strengthened NDAs and non-solicitations clauses. Regular updates to employment contracts will be crucial to align with the new Rule and incorporate comprehensive protections that compensate for the inability to enforce noncompete agreements.
Anticipated Legal Challenges
Legal challenges to the FTC’s rule have been filed regarding its validity and scope. Critics argue that the rule may exceed the FTC’s authority and conflict with existing state laws. Employers should monitor these developments closely and consider engaging with legal experts to navigate the evolving regulatory environment effectively.
Conclusion
The FTC’s final rule on non-compete agreements represents a paradigm shift designed to foster a more dynamic and competitive labor market. While this introduces new challenges for employers, it also offers an opportunity to innovate in how they attract, retain, and secure their workforce.
Businesses should act proactively and consult with a legal professional to ensure compliance and to strategize how best to maintain a competitive edge in this new regulatory environment.
Louis J. Licata, Esq., co-managing partner at Gertsburg Licata and co-author of “The Lawsuit-Free Company: How to Use the CoverMySix Method to Minimize Risk, Increase Value and Protect Your Freedom”. Mr. Licata oversees the firm’s operations and directs its Global Business Group. With expertise in global strategy, new market entry, corporate governance, and risk management, Mr. Licata serves as a trusted chief legal advisor to domestic and international middle market businesses. For consultations or inquiries, he can be reached at [email protected] or by phone at (216) 573-6000.
Sources:
- Federal Trade Commission (FTC). “Non-compete Clauses in the Workplace: Economic Effects and Legal Implications.” April 2024.
- S. Department of Labor, Bureau of Labor Statistics. “Employment and Wage Effects of Non-compete Contracts.” March 2024.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
