Big news this week for employers and other businesses out there. On April 23, 2024 the Federal Trade Commission issued a final rule banning essentially all non-compete agreements between employers and employees nationwide. This final rule will become effective 120 days after publication in the Federal Register. While we don’t have a precise date yet, it’s likely to be summer 2024.
You might remember our blog post from the beginning of this year that discussed the FTC’s proposed rules. Since this proposed rule came out, the FTCreceived over 26,000 public comments regarding its proposed ruling, 25,000 of which allegedly were in support of banning non-compete agreements.
What’s a non-compete?
The regulation defines a non-compete clause as a contractual term between an employer and worker that prevents the worker from seeking or accepting employment with another business or operating their own business after the worker’s employment with the employer is over.
Essentially, a non-compete bans an individual from working with a competing company or operating a competing business within the same geographic area or within a certain period of time after their employment ends.
What’s so important about the word “worker?”
This is a critical point. The FTC intentionally used the word “worker” instead of “employee,” because worker is a broader term. It includes independent contractors and others who do not have a W-2 relationship with the company. Thus, the ban extends to non-competes with independent contractors as well.
Why is the FTC banning non-competes?
According to FTC Chair Lina M. Khan, “non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.”
In justifying the rule, the FTC provides numerous statistics highlighting what the ban on non-competes will accomplish, claiming that:
- Business formation will grow by 2.7% each year, resulting in 8,500 new businesses created each year;
- Estimated earnings for the average worker will increase by an additional $524 per year; and
- Health care costs will be lowered by up to $194 billion over the next decade.
Essentially, the FTC contends that non-competes hinder competition and allow companies to keep compensation and benefits for employees and other workers lower than they would otherwise be if non-competes weren’t present.
Who’s affected by this ban?
In short, nearly every company and every worker are affected by this ban on non-competes. The final rule contains an exception only for non-competes used in connection with the sales of a business. Non-compete agreements will continue to be acceptable to the federal governing if they’re entered into in connection with selling your business, selling an ownership stake in your business, or selling substantially all of the business assets.
So if you’re running a business, this non-compete ban from the FTC may significantly hinder your ability to protect your company. On the other hand, if you’re a worker, the non-compete ban has just given you a gift. You can join a company, get educated, and then go elsewhere and compete against the company that taught you everything you know.
They’re looking back, too!
Once the rule goes into effect, currently-existing non-compete agreements will become unenforceable among all workers with only one exception.
The rule allows currently-existing non-competes only for senior executives to remain in force. Under the rule, senior executives are defined as workers with an annual salary of more than $151,164 who are in a “policy-making position.”
According to FTC statistics, less than one percent of workers are senior executives as that term is defined in the new regulation.
Is anything safe?
Well, for now, there’s no regulatory action on non-solicitation provisions. Generally speaking, a non-solicitation provision is a contract clause that limits someone’s rights or ability to solicit – sell to – a current customer or client. A non-solicit agreement also can be used to stop someone from stealing coworkers. Right now, you can still use a non-solicitation provision.
What happens now?
If the already-filed litigation doesn’t stop the regulation from becoming effective, then 120 days after the rule’s publication in the Federal Register, nearly all currently-existing non-competes will be unenforceable. Companies will not be able to use non-competes in any future situations other than the sale of a company.
Of course, not everyone is particularly happy with this final rule. Due to its controversy, it comes as no surprise that the FTC is already facing its first lawsuit. On April 24, 2024 just one day after the final rule was issued, the U.S. Chamber of Commerce filed a lawsuit in the Eastern District of Texas against the FTC, alleging that it lacks the power to adopt rules such as this ban on non-compete agreements.
In its lawsuit, the Chamber states “the FTC is empowered by federal law to enforce existing antitrust laws passed by Congress, but not to enact rules determining what other type of conduct by businesses is anticompetitive.”
Even though the final rule is already being challenged, and lawsuits have emerged, it is important to know about the final regulation and begin preparing. If the regulation isn’t stopped, you’ll be required to provide notice to your workers who were previously bound by an existing non-compete that the non-compete will not be enforced against them.
Within the final rule, the FTC has offered proposed guidance for employers on how to unwind existing non-compete agreements. We can thank the FTC for that gem, now, can’t we?
If you’re feeling brave, you can read the entirety of the FTC’s 570 page final rule here. If you’re simply looking for some quick facts on the ruling, here’s the FTC’s press release on the final rule.
Questions?
If you’ve got questions, call us. We’re happy to walk you through this insufferable landmine created by the FTC. We also work with companies on all manner of employment-law-related issues, both federal and New York State.
