On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule prohibiting all non-compete agreements for all employees at all levels, with only extremely limited exceptions. “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
Though approved by the FTC, the final rule is not yet effective and faces pending legal challenges.
The final rule broadly bans all true non-compete clauses. A non-compete clause is not just a contractual term but can include any workplace policy, whether oral or written. A “non-compete clause” is “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting work after the conclusion of employment, or operating a business after the conclusion of employment.
All current and former workers, regardless of which entity hired or contracted with them to work and regardless of the worker’s position, title, or status, are covered by the final rule. While the final rule prohibits new non-compete clauses for “senior executives” following the effective date, non-compete clauses entered into with senior executives prior to the effective date remain enforceable.
Employers must give notice to workers who entered into a non-compete clause that the non-compete provisions are unenforceable. The notice must identify the person who entered into the non-compete with the worker. Additionally, the notice must “be on paper,” delivered by hand, by mail, by email, or by text message. Model language for the notice that employers may use is provided in the final rule.
The final rule will become effective 120 days after publication in the Federal Register, but publication will in all likelihood not occur until the rule undergoes review by the President, Congress, and the Government Accountability Office. Moreover, significant legal challenges to the rule are pending.
For the time being, all restrictive covenants should continue to be drafted narrowly to protect a legitimate business interest of the employer, such as trade secrets, confidential information, or customer goodwill. The restrictions themselves should be no broader than necessary to protect those legitimate interests, and they must be reasonable in terms of duration, geography, and scope of activities prohibited. Agreements should be drafted in a way to increase the likelihood that any provisions found to be unlawful can be severed from the agreement, leaving other restrictions intact. Restrictive covenants generally should not be used with lower-level workers absent legitimate reasons to do so. Finally, since the federal rule is not yet in effect, employers must also be mindful of how the law on non-competes varies widely at the state level.
At Nicolai Law Firm, we are available to discuss the rule and to assist with reviewing and revising restrictive covenant agreements.
*** Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. It is likely considered advertising. ***
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