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Major Shakeup for Non-Compete Clauses: A Look at the FTC's Final Rule

Posted by Christin D. Hoyt | May 14, 2024 | 0 Comments

The landscape of employee mobility took a dramatic shift on April 23, 2024, with the Federal Trade Commission (FTC) issuing its final rule on non-compete clauses, codified at 16 CFR Part 910. This landmark regulation significantly restricts employers' ability to enforce non-compete agreements with most workers. The anticipated effective date of the new rule is September 4, 2024.

What Does the Rule Do?

In a nutshell, the FTC's final rule prohibits employers from:

  • Entering into new non-compete agreements with employees, regardless of position.
  • Enforcing existing non-compete agreements with most employees.
  • Misrepresenting to workers that they are subject to a non-compete clause.

There is a narrow exception for senior executives. The rule allows employers to enter into non-compete agreements with senior executives retaining policy-making authority, but only under limited circumstances. There is also an exception for non-competition agreements agreed to in the context of selling a business.

Why Did the FTC Take Action?

The FTC views non-compete clauses as unfair methods of competition that restrict worker mobility and stifle innovation. The Commission believes this rule will empower workers to pursue better opportunities and encourage competition in the labor market.

What Does This Mean for Employers?

Employers need to be aware of the following:

  • Any new non-compete agreements entered into after the effective date will be unenforceable with the few exceptions.
  • Existing non-compete agreements with the vast majority of employees are likely no longer enforceable. However, it is advisable to consult with legal counsel to determine the specific impact on existing agreements.
  • For all non-competes that are being nullified, employers are required to provide clear and conspicuous notice to the worker by the effective date that the worker's non-compete clause will not be, and cannot legally be, enforced against the worker. There is an exception to the notice requirement when the employer is unable to obtain the correct contact information for the person requiring notice.

What Should Employers Do Now?

  • Review existing non-compete agreements and determine if they are covered by the new rule.
  • Consider revising employee contracts to remove unenforceable non-compete clauses.
  • Explore alternative ways to protect confidential information and legitimate business interests, such as trade secret protections and customer non-solicitation agreements (which are still permissible under the rule). However, caution is to be taken with non-solicitation agreements, as they can sometimes put heavy restrictions on the employee and functionally have the same effect as a non-compete. In such cases, the FTC would use a fact-specific inquiry to determine if the non-solicitation clause is effective.

What Should Employees Do?

  • If you were previously bound by a non-compete clause, the FTC's rule may have rendered it unenforceable. Consult with one of our attorneys to understand your rights.
  • Be aware that the rule doesn't prevent employers from enforcing other restrictive covenants, like non-solicitation agreements.

The FTC's final rule on non-compete clauses is a significant development with far-reaching implications for both employers and employees. The U.S. Chamber of Commerce has already vowed to sue the FTC over the rule, and it is anticipated there will be several more challengers. Staying informed and seeking legal guidance is crucial for navigating this new regulatory landscape. If you believe you or your business will be impacted by this new rule, please contact our attorneys for additional guidance.

 

About the Author

Christin D. Hoyt

Our Attorneys

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