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On April 23rd the Federal Trade Commission (FTC) issued a final rule that effectively bans employers’ use of all non-compete agreements (with very limited exceptions). The final rule is scheduled to go into effect 120 days after it is published in the Federal Register, which is expected to happen by April 26th.
The rule applies to all agreements (and clauses within broader agreements) that prevent a worker from accepting work with a different person or operating their own business. The prohibition covers agreements with any worker, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The rule does not, however, apply to non-compete clauses contained in documents for the sale of a business, nor does it cover enforcement actions where the cause of action related to a non-compete arose prior to the effective date of the rule. Finally, because the FTC does not have jurisdiction over banks and federally-chartered credit unions, the rule does not apply to them, but it does apply to state-chartered credit unions.
The rule prohibits employers from entering into non-compete agreements with employees, and from enforcing existing non-compete agreements, with the exception of agreements with “Senior Executives.” The regulation defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164. A “policy-making position,” is a business’ president, CEO or equivalent, or any other person with “policy-making authority” for the business similar to a corporate officer with policy-making authority. The term “policy-making authority” means the authority to make policy decisions controlling “significant aspects of a business entity or common enterprise.”
Once the rule is effective, employers are required to provide “clear and conspicuous notice” to all workers whose agreements have been declared unenforceable by the final rule that the worker’s non-compete clause cannot legally be enforced against the worker, by the effective date. This notice must be in written form and delivered by hand, mail, email, or text message. The final rule provides model language for this notice. One complication to consider is whether an employer must provide this notice to terminated employees who are still subject to non-compete agreements.
The rule does not expressly prohibit non-solicitation agreements, but does state that whether a specific restriction constitutes a non-compete clause is a “fact-specific inquiry,” which is an invitation to litigation over the issue. A broad non-solicitation agreement could be construed as a non-compete clause, and employers should carefully review their existing agreements so as not to run afoul of the law.
The FTC’s rule will be subject to legal challenge. The U.S. Chamber of Commerce filed a lawsuit on April 24th to challenge the rule and at least one business has also already filed a lawsuit. It remains to be seen whether the implementation of the rule will be postponed by any courts, or whether employers will still be required to comply with the rule while litigation proceeds. Stay tuned for further updates!
This is a good time for employers to take a close look both at existing non-compete clauses and other contractual provisions that may be argued to function as a non-compete provision under the regulation, including non-solicitation provisions. Because the legal fate of the regulation is unknown, employers should prepare for the rule’s requirements, but delay implementing changes until the initial legal rulings are issued. Finally, employers should review existing non-compete agreements to ensure compliance with their state laws. Oregon’s and Washington’s state non-compete laws have both been modified in recent years, so it is important to know whether an employers’ existing non-competes are enforceable, even under state law.
The employment lawyers at Farleigh Wada Witt are available to assist you with all of your questions and needs related to non-compete agreements.
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