In an open commission meeting on Tuesday, April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to ban nearly all non-compete agreements between employers and workers (broadly defined to include employees, independent contractors, and others, whether paid or unpaid). The effective date of the final rule could be on or about August 23, 2024, depending on the success of legal challenges, which have already commenced.
The rule will ban new non-competes for all workers as of the effective date. The rule will also prohibit enforcement of existing non-competes with workers, except those with senior executives. “Senior executives” are workers in policy-making positions who earn annual compensation of at least $151,164; the FTC estimates that fewer than 1% of workers would qualify as senior executives under the final rule. While the final rule does not apply to the enforcement of existing non-competes against senior executives, it does prohibit employers from entering into new non-competes with senior executives after the effective date.
As with the proposed rule, the final rule does not expressly prohibit other types of restrictive covenants, such as non-disclosure or non-solicitation agreements. However, the final rule does prohibit covenants or agreements that function as non-competes; regardless of their title, if a term or condition “is so broad or onerous that it has the same functional effect as” a prohibition or condition “prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule.” As a result of this broad definition, agreements that are not often thought of expressly as “noncompete agreements” could be deemed to be prohibited non-competes, depending on their impact.
The final rule does not apply to a non-compete clause entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership in a business entity, or of all or substantially all of a business entity’s operating assets.” This exception is not conditioned on the amount of the person’s ownership in such entity or assets, as was the case in the proposed rule.
By the effective date, employers will be required to provide clear and conspicuous notice to each current and former worker whose non-compete will become unenforceable explaining that their non-compete will not be enforced against them. However, this requirement will not apply if a cause of action related to a non-compete has accrued prior to the effective date.
Many groups and businesses – and the two dissenting Federal Trade Commissioners – have argued that the rule exceeds the FTC’s statutory authority and that the rule is impermissibly retroactive in effectively extinguishing millions of contracts that were legal at the time in which they were entered into. The U.S. Chamber of Commerce and at least one company have already filed lawsuits seeking to block the final rule.
Dykema is closely monitoring the progress of the final rule and the anticipated legal challenges to the rule to provide guidance to clients with non-competes and other restrictive covenants that may fall under the final rule’s definition of non-competes or are considering these types of agreements or policies.
For more information about the final rule, please contact Jim Hermon, Howard Iwrey, Cody Rockey, Elizabeth Voss, or your Dykema relationship attorney.