Understanding the FTC Ban on Non-Competes – What Does it Mean and What Can Businesses Do?

The U.S Federal Trade Commission (FTC) approved a proposed final rule banning most new noncompete clauses in agreements (noncompetes) and voiding most existing noncompetes. Link to Final Rule. The rule is due to become effective 120 days after its publication in the Federal Register. However, lawsuits will be filed regarding the rule which will stay the rule’s effective date. While the fate of noncompetes is yet to be determined, businesses with noncompetes should understand the potential impact of the rule and take steps to protect their valuable assets. It is crucial to note that the rule is limited to noncompetes: nondisclosure agreements, confidentiality agreements, trade secret provisions, and nonsolicitation agreements all remain available to businesses. Noncompetes are about restricting a person’s ability to get a job in a competing business or open a competing business and that is what the rule prohibits.

The Rule

If the rule as written comes into effect, all noncompetes will be banned in the United States. Noncompetes are defined as written or oral terms or conditions of employment that prohibit a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work with a different person or business after the conclusion of employment or operating a business after the conclusion of employment. Link to Final Rule. All existing noncompetes will be void and unenforceable, except those involving senior executives and those related to the sale of a business. Prior to the effective date of the rule, businesses will be required to notify employees and former employees who are parties to noncompetes, in writing, that it is unlawful for the business “to maintain a non-compete clause in your employment contract.” The rule provides model language for businesses to use and permits businesses to notify existing and former employee via email, text and/or mail. 

In order for existing noncompetes with senior executives to remain in effect, the senior executive must meet the salary threshold and duties test under the rule. A senior executive is someone who (1) earns more than $151,164 in the preceding year (including salary, commissions and non-discretionary bonuses); and (2) has “policy-making authority” which means has final authority to make policy decisions that control significant aspects of a business entity or a common enterprise. The individual must be at the level of president, chief executive officer or an equivalent position with similar authority to a president or officer. Partners in a business would generally qualify assuming they have authority to make policy decisions about the business. To be clear, after the effective date of the rule, it will be unlawful to enter into noncompetes with senior executives.  The exception applies to existing noncompetes with senior executives only.

What Can Businesses Do?

Businesses should use the period of time when the rule is being challenged to identify current and former employees who could be parties to noncompetes to be able to readily notify them of the status of their noncompetes. The rule suggests that businesses could opt to send the notification to all existing employees to save time in identifying impacted individuals.

Businesses should confirm that they are protecting their confidential information and client/customer base, and protecting their biggest asset – their employees – with robust confidentiality and non-solicitation agreements which will be enforced by courts, assuming they comply with local, state and federal laws. However, the rule prohibits businesses from using backdoor provisions that effectively prevent an employee from working for a competitor or setting up a competing business. Protecting your business does not have to include restricting your employees from working, but should include restricting your employees from taking confidential business information, clients/customers and your employees when they depart.

P|K Tuned-In provides general legal information, not legal advice.  You should consult your attorney for guidance specific to your particular situation.