FTC Ban on Non-Competes – The Latest Update

Employment / Health Law Alert by Lamb McErlane attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.
On April 26, 2024, we posted an article, “Breaking News: Non-Compete Agreements Banned by the FTC, But Will it Last,” on the Federal Trade Commission’s (“FTC”) final rule prohibiting employers from making or enforcing non-compete provisions. After attending the FTC’s “FTC Compliance Webinar on Final Noncompetes Rule,” (the “Webinar”) we have set forth important updates below.
First, the final rule (also known as the Non-Compete Clause Rule) was published in the Federal Register on May 7, 2024. Accordingly, the final rule will be made effective on September 4, 2024 (the “Effective Date”).
Second, it is the FTC’s position that regardless of any legal challenges currently faced by the FTC, or faced in the future, the Effective Date shall be adhered to until and unless the final rule is expressly overturned. So, what does this mean for employers and workers?
Prohibited Acts
As of the Effective Date, it will be unlawful for a person covered by the final rule (i) to enter into or attempt to enter into a non-compete clause, (ii) to enforce or attempt to enforce a non-compete, and (iii) to represent that the worker is subject to a non-compete clause (provided that the worker is not a senior executive that entered into the non-compete clause prior to the Effective Date). All current non-competes subject to the final rule will become unenforceable as of the Effective Date. The final rule will not apply to senior executives (i.e., someone who makes over $151,164 per year[1] and is in a policy-making position[2]) currently subject to a non-compete. However, new non-competes will be unlawful and unenforceable for senior executives (and other workers) after September 4, 2024. The “key word” here is “attempting.” “Attempting to enter into a non-compete clause” will include providing a worker with an agreement containing a non-compete clause, even if it is not going to be enforced.
Type of Clause
A non-compete clause is a term or condition that prohibits, penalizes, or functions to prevent a worker from (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition. The FTC takes the position that if term or condition is so broad or cumbersome that it essentially would prevent a worker from seeking or accepting work or operating a business after the conclusion of employment, then it “functions to prevent” the worker from competing in direct violation of the final rule.
Persons and Entities Covered by the Rule
Workers covered by the final rule include employees, independent contractors, externs, interns, volunteers, apprentices, and others. Employers subject to the final rule will be all businesses and other persons within the FTC’s jurisdiction. The FTC stated on the Webinar that the FTC’s jurisdiction does not likely include many banks, loan institutions, and certain bona fide nonprofit entities. However, it remains unclear exactly which businesses and/or nonprofits would fall within and without the FTC’s jurisdiction. Any business questioning whether or not they are subject to the final rule should conduct a separate and personal legal analysis. The FTC has made it clear that the final rule will not apply to franchise agreements between a franchisor and franchisee, but will apply to (and therefore the non-competes would be unenforceable for) workers working for a franchisor and/or franchisee. The final rule will also not apply to the buyer and seller in a sale of a business. The FTC takes the position that even if a business or party is not subject to the final rule, the non-compete may still be unlawful under different antitrust laws. The FTC makes clear that the final rule will not prohibit non-competes preventing workers from taking competing jobs outside the United States.
Third, in order to comply with the final rule, employers should adhere to the simple steps set forth below:
- Do not include non-competes in contracts, paperwork, or websites after the Effective Date.
- If you have active non-competes, give notice (meeting the requirements detailed below) no later than the Effective Date to those current and former workers who are not senior executives that their non-competes are enforceable.
- Do not enforce non-competes after the Effective Date.
Notice Requirements
Model language for the required notice can be found on the FTC’s website. Employers may send out mass notices or individualized notices to each applicable worker. Notice may be given: (i) on paper by hand delivery; (ii) by mail to the worker’s last known personal street address; (iii) by email at the workers last known personal email address and current working email address; or (iv) by text message to the worker’s last known personal number. The notice must be in English, but may also be accompanied by a version in another language. Employers are not required to formally rescind existing non-competes.
Fourth, an employer may look to other types of agreements (such as a non-disclosure agreement or non-solicitation agreement) for protections of proprietary information and legitimate business interests. But such employer should be sure to not make such agreements so large or broad that it functions to prevent a worker from seeking or entering new employment or starting a business.
The FTC has also provided guidance as to how the final rule will be applied as it relates to other types of agreements such as forfeiture for competition agreements, garden leave agreements, training repayment agreements, and severance agreements.
If you have any questions or if we may be of further assistance regarding the final rule, compliance, or other health law matters, contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.
[1] This annual amount includes all salary, commissions, bonuses, performance incentives, etc. and may be annualized based on previous calendar or fiscal year data.
[2] The FTC has advised that a policy making position includes a President, CEO or similar position but requires the person to have decision-making authority relating to the whole business. Therefore, a head of a division with decision-making authority would not be counted as a senior executive if his or her decision-making authority is limited only to his or her division, as opposed to the entire business.
*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.
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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.
Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.
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