NEW FEDERAL TRADE COMMISSION RULE SEEKS TO BAN MOST NON-COMPETE CLAUSES:
A new rule promulgated by the Federal Trade Commission purports to ban most, but not all, noncompete agreements. The rule is set to go into effect on September 4, 2024.
Generally, the new rule prohibits non-compete clauses, which are defined very broadly to mean 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. However, the rule differentiates between two classes of employees as applied to non-compete clauses: (1) senior executives and (2) workers other than senior executives.
Senior Executives:
With respect to a senior executive, beginning on September 4, 2024, it will be an unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause after September 4, 2024;
(ii) To enforce or attempt to enforce a non-compete clause entered into after the September 4, 2024; or
(iii) To represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after September 4, 2024.
For purposes of the new rule, a worker is a senior executive if they (1) were in a policy-making position; and (2) received from a person for the employment:
(i) Total annual compensation of at least $151,164 in the preceding year; or
(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 at least $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.
Policy-making position means 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 policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.
Total annual compensation is based on the worker’s earnings over the preceding year. Total annual compensation may include salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during that 52-week period. Total annual compensation does not include board, lodging and other facilities as defined in 29 CFR 541.606, and does not include payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other similar fringe benefits.
Workers Other Than Senior Executives:
With respect to a worker other than a senior executive, beginning on September 4, 2024, it will be an unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause;
(ii) To enforce or attempt to enforce a non-compete clause (regardless of when it was entered into); or
(iii) To represent that the worker is subject to a non-compete clause (regardless of when it was entered into).
Employer Notice for Existing Non-Compete Clauses:
For each existing non-compete clause that it will be an unfair method of competition to enforce or attempt to enforce under the new rule, the person who entered into the non-compete clause with the worker must provide clear and conspicuous notice to the worker by September 4, 2024, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The rule contains a form notice that can be used.
Exceptions:
The rule only contains three exceptions: (1) bona fide sales of business, where the non-compete clause is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets; (2) existing causes of action, where the cause of action related to a non-compete clause accrued prior to the effective date; and (3) good faith, where a person enforces or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the new rule is inapplicable.
Legal Challenges:
Given the sweeping impact of this new rule, several legal challenges are planned, and some have already been filed. Businesses should monitor developments but also prepare to implement the rule as of the effective date in the event the legal challenges are unsuccessful.