Complete Story
05/21/2024
FAQs About the FTC’s Rule Banning Non-Compete Agreements
Source: Fisher Phillips, May 16, 2024
Employers likely have lots of questions as you try to understand the FTC’s new non-compete ban. After all, non-competes have become a tool for businesses of all types and sizes, and if the rule survives legal challenges, it will ban these provisions between almost all employers and all employees. The new rule not only prevents employers from entering into new non-competes after the effective date, but also will require you to send notice to most workers who previously signed such agreements. Notably, you’ll need to explain that the worker’s non-compete clause will not be — and cannot legally be — enforced against them. The good news: we’re here to help. This Insight presents a series of frequently asked questions about all aspects of the rule as developed by key members of our Employee Defection and Trade Secrets Practice Group.
Big-Picture Overview
What happened?
After reviewing empirical research on non-competes and over 26,000 public comments, the FTC adopted a final rule that will prohibit employers from entering into most new non-competes and also prevents you from enforcing existing non-competes in all but a few circumstances, such as against a limited class of senior executives.
The rule is slated to take effect on September 4, though legal challenges could cause delays, or a court could invalidate the rule altogether. We will be closely following developments in this area.
What does the rule do?
Assuming the rule is not permanently blocked, it will require employers to:
- Provide clear and conspicuous notice prior to the effective date to current and former workers who do not qualify as a senior executive. The notice should explain that the workers’ existing non-compete clauses will not and cannot legally be enforced against them. The final rule provides model language, which can be used to satisfy this notice obligation and provides a safe harbor. (NOTE: The notice may be delivered by hand, by mail to the worker’s last known personal street address, by email at an email address belonging to the worker (work or personal), or by text message to a mobile telephone number belonging to the worker. An exemption to the notice requirement exists if no contact information is known.)
- Stop enforcing existing non-compete clauses with all workers other than senior executives (NOTE: it is not necessary to rescind the agreements).
- Refrain from entering into new non-compete clauses with workers.
For workers other than “senior executives” (as defined by the rule), attempting to enforce an existing non-compete clause, entering into a new non-compete clause, or claiming that the worker is subject to a non-compete clause constitutes unfair competition.
For “senior executives,” attempting to enter a new non-compete clause or claiming that the senior executive is subject to a non-compete clause (if the agreement is entered into after the rule’s effective date) constitutes unfair competition.
How does the Commission define “non-compete” clauses?
The rule defines “non-compete clause” to mean a contractual term (written or oral) that prohibits, penalizes for, or functions to prevent a worker from: seeking or accepting work from a different person or business, or starting a business, within the U.S., after the worker’s employment ends.
Why did the FTC do this?
In July 2021, President Biden issued an Executive Order titled “Promoting Competition in the American Economy.” It directed the FTC to exercise its “statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
In January 2023, the Commission followed through on the President’s request. With the release of the proposed rule, FTC Chair Lina Khan opined that non-compete clauses “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” The Commission reiterated its belief that non-compete clauses negatively affect competition in labor markets by suppressing wages and labor mobility, and by preventing new businesses from forming, stifling entrepreneurship, and preventing novel innovation that might otherwise occur if workers were not restricted from sharing their ideas.
The FTC estimates that 101 million workers are subject to non-competes, and that the rule will increase workers’ annual earnings in the U.S. by $524 per worker, totaling $53 billion nationally.
