FTC Issues Final Rule Banning Non-Compete Agreements Nationwide

The Federal Trade Commission (“FTC”) issued a final rule yesterday, effectively banning nearly all employee non-compete agreements nationwide. The final rule will take effect 120 days after its publication in the Federal Register, although it is already facing imminent legal challenges that could delay the effective date.

The FTC’s Final Rule: Definitions and Prohibitions

Existing non-compete agreements currently restrict employees from leaving their jobs to work for competitors or to start competing businesses. The FTC’s new final rule not only prohibits companies from entering into new non-compete agreements after the rule takes effect but also retroactively nullifies most existing agreements.

The final rule defines a "non-compete clause" as any term or condition of employment that:

1. Prohibits, penalizes, or prevents a worker from seeking or accepting work in the United States with a different employer after their current employment ends; or
2. Prohibits a worker from operating a business in the United States after their current employment ends.

The rule does not apply to or prohibit non-solicitation, confidentiality or invention assignment terms, but the FTC cautions that the rule will prohibit any term that operates like a non-compete clause.  Consequently, the rule has the potential to include and effectively ban other types of restrictive covenants, depending on how broadly those covenants restrict an employee’s activities and whether they operate in effect like non-compete terms.

The rule’s prohibition applies to employment agreements between employers and their employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to clients or customers.

Notably, since the FTC’s jurisdiction only covers for-profit businesses, the rule will not impact employment agreements made by workers employed by non-profit organizations. The rule also exempts non-compete clauses entered into with a seller of a business entity, provided that the sale involves the transfer of the person’s ownership interest in the business entity or the transfer of all or substantially all of the business entity’s operating assets. The rule also does not prohibit non-compete agreements between franchisees and franchisors and does not address commercial non-compete agreements between businesses.

Existing Non-Compete Agreements

If the rule takes effect, companies will be required to invalidate existing non-compete agreements for the majority of their employees. Existing non-compete agreements with senior executives would remain in place, however. The rule defines senior executives as a worker who makes more than $151,164 a year (through salary, bonus, and/or commissions) and who has the authority to make policy decisions controlling significant aspects of a business entity or enterprise. This exception only applies to existing non-competes; senior executives could not be subject to a new non-compete agreement executed after the effective date.

Employer’s Notice Responsibilities

Before the rule takes effect, employers must inform all current and former employees that any existing non-compete agreements are no longer enforceable.

Employers can use model language provided in the rule to fulfill this notification requirement and will be granted a “safe harbor” for compliance if they do so. Specifically, employers must provide “clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause is no longer in effect and will not be, and cannot legally be, enforced against the worker.” This will be sufficient to achieve the purposes of the rescission requirements without requiring any other affirmative conduct beyond the notice requirement.

Moving Forward

The FTC's final rule is expected to face several legal challenges. Today, business groups led by the US Chamber of Commerce sued the FTC seeking to block the rule, and a tax services and software provider has also already filed a lawsuit in Texas against the regulation.

Employers should plan for the necessary steps to provide notice to their non-senior executive employees, and to review existing non-compete clauses and other contractual provisions that could be interpreted as non-compete clauses under the regulation. While the legal outcome of the regulation remains uncertain, employers may want to prepare for complying with the rule but delay implementing compliance measures until the legal challenges are resolved. For assistance, please contact one of Honigman’s Labor and Employment Attorneys here.