FTC’s Final Rule Nixes Noncompetes – What’s Next? – Employee Rights/ Labour Relations

On April 23, 2024, in a nail-biting 3-2 decision, the Federal Trade Commission (FTC) voted to
publish its final rule banning noncompete provisions in employment
agreements.

You can read the entire rule here.

Last year (January 2023), the FTC released a proposed rule
banning noncompetes that seemed to stall. The proposed rule defined
a “non-compete clause” as one that prevents a worker
(employee, independent contractor, or intern) from seeking or
accepting employment with a person, or operating a business, after
the worker’s employment with the employer ends.

And, the FTC made clear that it would ban “de facto
noncompetes” too – there’s no dressing up a noncompete
provision to look like something else, like maybe a non-acceptance
of employment provision or a non-interference clause.

Yes, the FTC included some narrow exceptions to the proposed
rule.

I spoke about the proposed rule with some friends last year, here, if you want to compare the proposed with
the final.

What’s A Noncompete Per the “Final
Rule”?

The FTC’s final rule defines a noncompete as:

A “term or condition” includes, but is not limited to,
a written or oral contract term or workplace policy.

But lawyers want everything in writing! I can see the factual
disputes arising from this already.

How Does The Final Rule Impact Your Workforce?

Well, it depends on the workers and the timing.

For noncompetes entered into before the effective date (120 days
from publication in the Federal Register – maybe), only noncompetes
for “senior executives” are still OK, while noncompetes
with other workers are not enforceable after the effective
date.

Here’s who can be categorized as a “senior
executive” under this rule:

(1) workers earning more than $151,164 and

(2) who are in a “policy-making position.”

The FTC estimates that fewer than 1% of workers are estimated to
be senior executives by this definition.

Indeed, the ‘C-suite’ will likely be included in this
definition—as long as they are making decisions that have a
significant impact on the business, such as important policies that
affect most or all of the business.

(That’s probably not everyone.)

Senior executives who have final authority to “make policy
decisions” does not include authority limited to advising or
exerting influence over such policy decisions or having final
authority to make policy decisions for only a subsidiary of, or an
affiliate of, a common enterprise.

However, the FTC’s final rule bans on all
new post-employment noncompete agreements in the
employment context, regardless of the type of worker (rank and file
or C-Suite), after the rule’s effective date.

Photo by Ian Hutchinson on Unsplash

Employers Must Notify Workers That Their Noncompetes Are No
Longer Effective.

After the effective date, employers must notify all other
workers with noncompetes that their noncompetes are no longer
valid.

Helpfully, the FTC provides model language, which basically says
that the FTC requires the employer to tell workers that it (the
employer) cannot enforce the noncompete against the worker, and the
employee can go work with whomever and wherever they want and
compete to their hearts’ content.

Employers cannot require employees to agree to a noncompete
agreement or provision after the effective date of the final
rule.

What About State Laws Governing Noncompetes?

The final rule does not limit or affect the enforcement of state
laws that restrict noncompetes where those state laws do not
conflict with the final rule, but the final rule preempts state
laws that conflict with it.

In other words, the final rule would not preempt a state law
that provides greater protection to employees.

What About NDAs?

Employers, your nondisclosure agreements are safe, but, like
with the proposed rule, an NDA cannot be so broad that it is really
a noncompete provision in disguise.

What’s Next for Employers?

Really, it depends on the legal challenges, which are sure to
abound.

In fact, the U.S. Chamber of Commerce announced that it
would challenge the final rule before the FTC’s
meeting today.

Among its arguments, the Chamber asserts that the FTC does not
have the regulatory authority to issue this final rule and is
“impermissibly” retroactive.

Employers want to consider their risk tolerance to determine
whether they want to toss their noncompetes entirely, start
replacing noncompetes with narrowly tailored nonsolicitation
provisions instead, or simply wait for the dust to clear before the
effective date of the final rule.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.