Non-compete agreements are contract clauses designed to prevent employees from engaging in competitive business activities after leaving a company. They are traditionally intended to protect sensitive business information, such as trade secrets, customer names, relationships, and strategic plans. The Federal Trade Commission (FTC) passed a groundbreaking rule to ban non-compete clauses in employment agreements. Published on May 7, 2024, this rule will become effective 120 days later, on September 4, 2024 (“Final Rule”). This move marks a significant shift in employment law to enhance job mobility and promote fair competition in the marketplace. The FTC’s Final Rule effectively bans all non-compete agreements between employers and “workers” as “unfair methods of competition,” with limited exceptions.
Key Provisions of the Final Rule
- Ban on Non-Compete Clauses: The Final Rule prohibits employers from entering into or attempting to enter into non-compete agreements with workers.
- Rescission Requirement: Employers are required to rescind existing non-compete clauses and notify current and former employees that these clauses are no longer in effect.
- Broad Coverage: The Final Rule applies to employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer.
Restrictions Under the Final Rule
The Final Rule prohibits employers from entering into, and renders unenforceable, terms or conditions of employment that limit a worker’s ability to seek or accept employment or to operate a business after the end of their current employment. The rule covers “workers,” which includes employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a person. The Final Rule also requires that employers notify impacted workers that any existing prohibited non-compete provisions are unenforceable.
There are, however, important exceptions to the Final Rule. It does not prohibit contractual terms that prevent workers from working for two firms simultaneously and primarily becomes enforceable post-termination. It also does not prohibit non-compete clauses in the context of a “bona fide” sale of a business, eliminating the 25 percent ownership-interest threshold included in the initially proposed rule. Non-competes for “senior executives” are not prohibited. A senior executive makes over $154,164 annually and is in a policy-making position for the business. In most cases, non-competes with non-profit organizations will likely still be enforceable as these organizations typically do not fall within the FTC’s jurisdiction.
Lastly, the Final Rule does not explicitly ban non-disclosure agreements (NDAs), customer non-solicitation agreements, or employee non-solicitation agreements. Nevertheless, the Final Rule makes clear that it bans these other forms of restrictive covenants when they have the same functional effects as non-compete clauses.
Impact on Businesses
This rule necessitates a significant shift in how businesses protect their trade secrets and proprietary information and will require action from employers. Here are a few key points:
- Alternative Protections: Companies will need to rely more on NDAs and other forms of intellectual property protection to safeguard sensitive information.
- Review and Revise Contracts: Employers must review all existing employment contracts to ensure compliance with the Final Rule and remove any non-compete clauses.
- Notification Obligation: Businesses are required to inform current and former employees in writing that their non-compete clauses are rescinded.
Compliance Deadline: Businesses must ensure compliance with the new rule by September 4, 2024. Non-compliance could lead to significant legal and financial consequences.
Impact on Employees
For employees, the Final Rule offers greater job mobility and freedom. Here’s what you need to consider:
- Increased Opportunities: Employees will have more opportunities to switch jobs without the fear of legal repercussions from former employers.
- Greater Negotiation Power: The prohibition of non-compete clauses may enhance employees’ bargaining power in terms of salary and benefits when negotiating new job offers.
Legal and Practical Considerations
- It is important to note that the Final Rule does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause accrued prior to the Final Rule’s effective date. Prior to September 4, 2024, non-competes violations can still accrue actionable damages.
- While the Final Rule establishes a federal standard, it’s important to note that some states may have additional regulations or variations in their enforcement. Employers should consult with legal counsel to navigate these complexities.
Conclusion:
The Final Rule on non-compete agreements marks a significant shift in employment law aimed at boosting market competitiveness and worker mobility. Both employers and employees must understand the nuances of this rule to navigate the changing legal landscape effectively. For workers, this could mean greater career flexibility and opportunities. For employers, adapting to this change will be key to maintaining a competitive edge in attracting and retaining top talent. We at Lengea are happy to help you navigate this new law and determine the course of action that is best for you as an individual or a business.