FTC Issues Final Rule Banning Non-Competes
On April 23, 2024, the Federal Trade Commission (FTC) adopted a final rule, the “Non-Compete Clause Rule,” that bars non-compete provisions in restrictive covenant agreements. Under this rule, not only are not-compete provisions prohibited, but employers must provide notice to those currently under restrictive covenant agreements that the non-compete provision is no longer valid. The rule broadly covers non-compete provision (including terms that function like non-compete provisions) between virtually all types of employers, except nonprofit organizations and franchisees and franchisors in limited circumstances, and their workers. Covered workers may include independent contractors, interns, and volunteers.
There are notably a few exceptions to the rule including, existing non-competes with senior executives, or employees in policy-making positions with annualized compensation of over $151,164. Such non-competes remain intact and are not subject to rescission. New non-competes with senior executives, however, are banned by the rule. The rule also has a carveout for non-competes entered into by a person during the “bona fide sale of a business,” of the person’s ownership interest in a business entity or of all or substantially all of a business’s operating assets. Employers will have to notify all current and former employees that existing non-competes are no longer enforceable. The rule provides form language to effectuate the notice.
The final rule is slated to go into effect 120 days after publication in the Federal Register. However, multiple lawsuits have already been filed challenging the rule. Litigation is predicted to delay the effective date. These suits may result in a stay, thereby providing employers with more time to comply with the rule, or could result in the rule being overturned. Until the final rule goes into effect, employers can enter into new non-competes or modify existing non-competes with senior executives without restriction, and the new or modified non-competes will be grandfathered as pre-existing agreements.
Williams Parker is closely monitoring developments and the impact this rule may have on businesses, while helping clients navigate the new landscape.