On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule (Final Rule) banning non-compete agreements between employers and their employees, subject to limited exceptions. The Final Rule does not take effect until 120 days after its publication in the Federal Register and is already subject to legal challenge.
The Final Rule prohibits all future “non-compete clauses” and renders existing non-competes between employers and workers who do not qualify as “senior executives” unenforceable. “Non-compete clauses”, as used in the Final Rule, means a term or condition of employment that prohibits a worker from, penalizes a worker for, 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.”
Non-competes with “senior executives” entered into before the Final Rule takes effect remain intact. Employees “in a policy-making position” and who meet the senior executive compensation threshold fall into the definition of “senior executives” under the Final Rule. Employees “in a policy-making position” include officers with final authority to make policy decisions controlling significant aspects of a business entity. The compensation threshold is (i) total annual compensation of at least $151,164 in the preceding year; (ii) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (iii) total compensation of $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
The Final Rule requires employers to notify all present and former workers who entered into a non-compete that the non-compete “will not be, and cannot legally be, enforced against the worker.” Such notice must be individualized to the effected worker and be delivered by hand-delivery, mail at the worker’s last known address, by email, or by text message.
The Final Rule does not apply non-compete agreements entered into in connection with a bona fide sale of a business entity, a person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets. Thus, non-competes entered into in connection with the sale of their business or their business’s assets are and will still be enforceable after the Final Rule takes effect.
Uncertainty still surrounds the applicability of the Final Rule to other common agreements between businesses and their employees, such as confidentiality and/or non-disclosure agreements (NDAs) and non-solicitation agreements. The FTC has explained that the enforceability NDAs and non-solicitation agreements require fact-specific analyses to determine whether such agreements “function to prevent” a worker from obtaining future employment or operating a business.
If you have any questions about how this may effect your business, please reach out to Byron Bowles or Gabriel Greenbaum.
Disclaimer and warning: This information was published by McAnany, Van Cleave & Phillips, P.A., and is to be used only for general informational purposes and should not be construed as legal advice or legal opinion on any specific facts or circumstances. This is not inclusive of all exceptions and requirements which may apply to any individual claim. It is imperative to promptly obtain legal advice to determine the rights, obligations and options of a specific situation.
