In January, we published a blog post noting that the Federal Trade Commission (FTC) had proposed a rule to ban new and existing non-compete agreements. On Tuesday, April 23, the FTC followed through on this proposal and issued their final version of the new rule. This final rule is mostly identical to the proposed rule, with only minor changes from the proposed rule. Here is what you need to know.
What is Covered?
Both new and existing non-compete clauses are prohibited under the new rule. The rule defines a non-compete clause as any term or condition of employment that prevents a worker from:
- Seeking or accepting work with a different employer in the United States, or
- Operating a business in the United States after employment has ceased.
This includes not only flat prohibitions, but also agreements that penalize workers – such as requiring a worker to repay an employer for training expenses if they leave their job before a certain date.
When Does the Rule Go into Effect?
The new rule will take effect in late August or early September. The exact date will be known once the final rule is published in the Federal Register. Until that time, it is possible that the FTC could face legal challenges or decide to make changes to the rule, though the likelihood of any of these events is uncertain.
What are the Exceptions?
The new rule focuses on non-competes for workers, and not all non-compete agreements are banned. The following are still permitted:
- Agreements by workers to not compete with an employer while still working for them.
- Non-competes for an owner pursuant to the sale of a business.
- Non-compete agreements between two businesses.
- Non-nompetes that restrain a worker’s right to seek employment or operate a business outside the United States – though the enforceability of these clauses may vary by country.
- Existing non-competes for senior executives. A senior executive is defined as someone who (1) earns more than $151,164 annually and (2) holds a “policy-making position.”
- However, NEW non-competes for senior executives are not permitted after the rule goes into effect.
What Do Employers Need to Do About Existing Non-Compete Agreements?
Employers who have existing non-compete agreements do not need to modify or void those agreements. However, they must provide notice to the affected workers that the noncompete agreement will not be enforced against them in the future.
To aid with compliance, the FTC has created a model notice that employers can provide to workers.
How Does This Affect Similar Agreements, Such as Confidentiality and Non-Disclosure Agreements?
Non-disclosure, confidentiality, and similar agreements are still generally permitted, the FTC encourages employers to use these as “alternatives” for non-competes. However, these types of agreements may still be found unenforceable if they “have the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment.”
Conclusion
While employers do not need to take immediate action to eliminate their non-compete agreements or notify workers of the change, they should plan on doing so in the latter half of this year. Critchfield will continue to monitor the situation and provide updates regarding any new guidance or changes to the rule.
Critchfield attorneys are available to assist you and answer any questions you may have about this new rule and how it may affect you or your business. Critchfield’s attorneys regularly advise and litigate on matters related to non-compete and other restrictive employment covenants, including non-solicitation, confidentiality, and trade secrets.
Tagged In:FTCNon-Competenon-compete agreementrestrictive covenant