Employer Alert: FTC’s final rule on non-compete clauses bans employers from entering into and enforcing non-competes with workers after effective date, with limited exceptions

April 30, 2024

The FTC’s final Non-Compete Clause Rule

On April 23, 2024, the FTC published its final rule regarding non-compete clauses, which will significantly impact employers. Finding that these clauses are a method of unfair competition, the FTC’s new rule effectively bans employers from entering into non-competes with workers on or after the rule’s effective date. With respect to existing non-competes—those entered into before the effective date—the rule adopts a different approach for “Senior Executives” than for all other workers. For Senior Executives, existing non-competes can remain in force, while existing non-competes with all other workers are not enforceable after the effective date.

The final rule defines a “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Importantly, the FTC clarified that the “functions to prevent” prong does not categorically prohibit other types of restrictive employment agreements, such as, NDAs, TRAPs, and non-solicitation agreements; these covenants may still be enforceable against workers. Garden leave agreements, which refer to a wide variety of agreements, are not necessarily banned under the final rule either.

A “worker” is broadly defined as a person “who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” Workers hired by one party but working for another, such as workers hired through staffing agencies, are covered under this rule as well.

The FTC has outlined several limitations to the comprehensive rule. The final rule does not apply to non-competes entered into pursuant to a bona fide sale of a business entity nor does it extend to restraints on concurrent employment. Where a cause of action related to a non-compete accrued prior to the effective date, the final rule does not apply. This includes, for example, where an employer alleges that a worker accepted employment in breach of a noncompete if the alleged breach occurred prior to the effective date.

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What You Should Know

The rule will become effective 120 days after the FTC publishes it in the Federal Register and will not affect State laws that are more restrictive with regards to non-competes.

The final rule’s key provisions are as follows:

New Non-Compete Clauses – The final rule prohibits employers from entering into or attempting to enter into a non-compete clause with all workers, on or after the effective date.
Existing Non-Compete Clauses for All Workers, except Senior Executives – Employers are prohibited from enforcing or attempting to enforce a non-compete clause or representing that a worker is subject to a non-compete clause after the effective date. Employers must provide notice to current and previous workers subject to non-compete clauses, that they are no longer enforceable after the effective date. Notably, the final rule does not require employers to rescind prior non-compete clauses.
Existing Non-Compete Clauses for Senior Executives – The final rule provides a limited exception to the complete ban of non-competes for Senior Executives. A “Senior Executive” is defined as a worker who is in a policy-making position and earned at least $151,164 in the previous year. Under this exception, existing non-compete clauses with these workers remain enforceable.
Notice Requirement for Employers – Employers must provide “clear and conspicuous” notice to workers, by the effective date, informing them that their non-competes will not be, and cannot legally be, enforced against them. The notice must be delivered to workers by mail at the worker’s last known personal street address, by email at an email address belonging to the worker, or by text message at a number belonging to the worker. The rule makes it optional to provide notices in languages other than English, but the FTC encourages employers to adopt this practice.

- The rule provides the following model language:
  A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a noncompete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any noncompete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

- - You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
  - You may run your own business—even if it competes with [EMPLOYER NAME].
  - You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at ftc.gov/noncompetes.

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Next Steps for Employers

Employers should prepare to provide notices to current and previous workers with non-competes in compliance with the notice requirement by the rule’s effective date. Employers should also consider review of existing NDAs and non-solicitation agreements to ensure they are not overly broad and covered by the FTC rule and discuss amending existing agreements that contain non-competes to avoid any potential blue-pencil concerns down the road. Please contact a member of the CFDB team for any inquiries relating to this matter.

Tracey Wolfe
Partner
twolfe@crokefairchild.com
312.636.2435

Heidi Steiner
Senior Counsel
hsteiner@crokefairchild.com
773.294.9256