The U.S. Federal Trade Commission (“FTC”) approved a Final Rule that bans new non-compete clauses in employment contracts and severely limits the enforceability of existing non-competes. In issuing this Final Rule, the FTC asserted, “it is an unfair method of competition – and therefore a violation of Section 5 of the Federal Trade Commission Act – for persons to enter into non-compete clauses with workers on or after the final rule’s effective date.” With respect to existing non-competes entered into before the effective date, the Final Rule distinguishes between “senior executives” and all other workers. Non-competes entered into before the effective date of the Final Rule can remain in force for senior executives, while existing non-competes for all other workers will NOT be enforceable after the effective date. Significantly, employers also are required to provide notice to those employees whose non-competes are no longer enforceable. The Final Rule is scheduled to go into effect 120 days after its publication in the Federal Register, which likely will occur within the next month.
The FTC defines “senior executives” as workers who earn more than $151,164 annually and are in “policy-making positions.” A “policy-making position” is defined as a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has “policy-making authority,” or any other natural person who has similar policy-making authority for the business. “Policy-making authority” is considered final authority to make policy decisions that control significant aspects of a business entity and does NOT include authority that is limited to advising or exerting influence over such policy decisions. As such, policy-making authority is assessed based on the business as a whole and not a particular office, department, or other sublevel. Presidents, chief executive officers, and their equivalents are presumed to be senior executives for purposes of the Final Rule, and many executives in the “C-suite” likely will as well, so long as they have final authority to make decisions that have a significant impact on most or all of the business.
Further, “non-compete clause” is defined as “a term or condition of employment that (1) prohibits a worker from, (2) penalizes a worker for, or (3) functions to prevent a worker from (A) 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 (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.” This includes contractual terms and workplace policies, whether written or oral. For purposes of the Final Rule, “worker” is defined as “a natural 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 sole proprietor who provides a service to a person.”
The Final Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity, nor does it apply where a cause of action related to a non-compete accrued prior to the effective date. This cause of action exception includes when an employer alleges that a worker accepted employment in breach of a non-compete if the alleged breach occurred prior to the effective date. Further exempted from the Final Rule are entities which are outside the jurisdiction of the Act including “banks,” “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act of 1921,” as well as not-for-profits. The Final Rule likewise does not apply to franchisor/franchisee non-competes. Finally, it does not apply to non-competes if they restrict only work outside the United States or starting a business outside the United States.
The Final Rule prohibits employers from entering into non-compete agreements with their employees after the effective date of the Rule and nullifies nearly all existing non-compete agreements. The only non-compete agreements that will remain enforceable after the effective date of the Rule are those involving “senior executives.” Notably, the Final Rule preempts all current state laws involving non-competes unless those state laws provide for greater worker protection. While the Final Rule does not categorically prohibit other types of restrictive covenants such as non-disclosure agreements, confidentiality provisions, or non-solicitation agreements, the FTC has commented that if such current provisions are “so broad or onerous” as to have the same effect as non-competes, they are also prohibited.
Non-competes for workers who are not senior executives are no longer enforceable after the Final Rule’s effective date. With respect to those existing non-competes that are no longer enforceable, employers are required to provide notice by the effective date that they are no longer enforceable.
Additionally, while the Final Rule will likely face legal challenges that may delay its immediate roll-out, employers need to revisit their employment agreements to prepare for implementation of this Final Rule. Employers should review with counsel all restrictive covenants used in their employment agreements to ensure they are not so broad as to be considered unenforceable non-competes.
If you have questions regarding this new Final Rule, or need assistance in evaluating your non-competes or preparing your required notices, please contact Gaetano Urgo at gurgo@dcamplaw.com or by telephone at (312) 995-7128.
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