Yesterday, April 23, 2024, the Federal Trade Commission (“FTC”) published a final rule that prohibits virtually all non-compete agreements (“Final Rule” or “Rule”). Because this is a federal rule, this preempts any state law that is less strict, so this Rule will have far-reaching consequences.
Under the FTC’s new Rule:
- Existing non-competes for the vast majority of workers will no longer be enforceable after the Rule’s Effective Date, Wednesday, August 21, 2024 (“Effective Date”); and
- Employers are prohibited from entering into or attempting to enforce any new non-competes after the Effective Date.
- By the Effective Date, employers must notify current and former employees who signed a non-compete agreement that that agreement will not be enforced after the Effective Date. The FTC’s Final Rule has model language that employers can use for their notice. Using the model language prior to the Effective Date provides employers with a safe harbor for alleged notice violations.
There are very few exceptions to this Rule. Notably:
- Bona Fide Sales of Business Exception. Non-competes entered into as part of a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of substantially all of a business operating assets are not prohibited.
- Senior Executive Exception. Employers may enforce non-compete agreements entered before the Effective Date if the employee is a “Senior Executive.” Senior Executive is defined as a worker who (i) was in a “policy-making position” and (ii) received total annual compensation of at least $151,164 in the preceding year. Total annual compensation includes salary, commissions, and nondiscretionary bonuses/compensation.
- Existing Causes of Action Exception. If a cause of action related to a non-compete clause accrues prior to the Effective Date, the Final Rule does not apply.
- Good Faith Basis Exception. It is not a violation of the Final Rule to enforce or attempt to enforce a non-compete clause where the employer has a good-faith basis to believe that the non-compete is valid.
- Non-Profit Exception. Most non-profit organizations are not covered by the FTC and, therefore, the Final Rule does not apply. However, the FTC specifically said any profit driven company will be covered, regardless of its not-for-profit tax status. A good example of this is probably certain not-for-profit hospitals or other health care related businesses.
- Franchisee Exception. The FTC’s Final Rule covers natural persons who work for a franchisee or franchisor but does not include a non-compete between a franchisee and franchisor. However, “non-competes between franchisors and franchisees remain subject to [F]ederal antitrust law as well as all other applicable law.”
This new Rule will change the landscape for American businesses. However, various associations that advocate for businesses are promising to challenge this Rule. We expect an appeal well before the Effective Date. In fact, it would not be surprising if this case went all the way to the Supreme Court. In the meantime, the Rule may be stayed until a final decision is rendered; stay tuned!
Brody and Associates regularly advises management on complying with the latest local, state, and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.
