Employment Law Blog

It's Official: FTC Issues Final Rule Banning Non-Competes

In a stunning move the same day the Department of Labor issued a rule raising the overtime salary threshold, the Federal Trade Commission issued its own long-gestating rule banning noncompete clauses nationwide. Employers should begin reviewing their contracts immediately to understand how this sweeping change will affect their workforce.

The Basics

The Final Rule, issued Tuesday, April 23, 2024, has been in the works for an unusually long time. The rule as proposed appeared way back in early January of 2023, with the comment period ending over a year before publication of the Final Rule. At this point, employers have been on notice of the impending change for well more than a year, so it’s likely that plans are in place to adapt. If not, however, there’s no time like the present.

The Final Rule in its most basic form is fairly simple and unambiguous – as of the effective date of the new rule, all new non-competes with workers will be banned, all existing non-competes with workers other than “Senior Executives” will be unenforceable, and only existing non-competes with “Senior Executives” will remain valid. This will become effective in 120 days following publication in the Federal Register, so mere weeks remain for developing workarounds and alternatives in employment contracts for protection of trade secrets, client bases, and more.

The Details

As with any rule, however, the devil may be in the details – the rule is written expressly to apply only in the context of an employment contract; non-competes built into the sale of businesses, for example, will remain unaffected, so this is not a blanket ban on all non-competes in all contracts. The rule as published, however, contains hundreds of pages of language provided to help discern applicability. It evinces a concern on the part of the FTC that other contract clauses may be de facto non-competes by being overly coercive. Specifically discussed were overly-broad non-disclosure agreements, non-solicitation agreements or training repayment agreements that would serve as a non-compete clause by another means and would run afoul of the Final Rule.

For example, if an employee were to receive tuition reimbursement from the company, a provision requiring that it be repaid to the company if the employee leaves within a certain period is, in and of itself, not in violation of the rule. If that provision required the employee to repay the company $10,000 when the tuition was only $2000, however, it would probably violate the Final Rule. If a term prohibits a worker from, penalizes a worker for, or functions to prevent an employee from either seeking or accepting work elsewhere or operating a business, it will violate the Final Rule. 

The Final Rule doesn’t apply where a cause of action over a non-compete clause accrued prior to the effective date of the rule, and it won’t serve to show as an unfair method of competition if someone attempts to enforce a non-compete clause if the person has a good-faith reason to believe the Final Rule doesn’t apply.

In addition to exceptions for the sale of a business, the Final Rule leaves in place existing non-competes for “senior executives.” A senior executive for purposes of the Final Rule is someone who made at least $151,164 the preceding year and is in a policy-making position, which is the “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.” It does not apply, though, to those whose role involves merely advising or influencing those decisions.

Notice

The administrative burden on employers will take the form of the notice that must be provided to those under such agreements. Employers are required to give applicable workers notice that “must be on paper” and delivered by hand, mail, email or text message. The rule provides model language for this notice.

What now?

The Final Rule becomes effective 120 days after publication, but there are still a few more layers of review AND lawsuits already filed to block the Final Rule from taking effect, so there’s a chance the rule may be paused or even blocked. Still, now is the time to begin the review of all employment contracts for any clauses that may violate the Final Rule should it take effect. Contact your McBrayer attorney today for more information or for assistance with this process.

Cynthia L. Effinger, Member with McBrayer, is located in the firm’s Louisville office. Ms. Effinger’s practice is concentrated in the areas of employment law and commercial litigation. Her employment law practice is focused on drafting employment manuals and policies, social media, wage and hour, non-compete agreements and workplace discrimination. Ms. Effinger can be reached at ceffinger@mcbrayerfirm.com or (502) 327-5400, ext. 2316

Services may be performed by others. This article does not constitute legal advice.