An increasingly common practice in American business involves requiring employees to sign covenants not to compete, usually referred to as "non-competes," with their employers or prospective employers. These agreements typically prohibit employees from going to work for businesses that compete with their former employer after they leave that employer, starting businesses that compete with their former employer, or otherwise entering into competition with the business for which they formerly worked.
In the past, non-competes primarily involved senior executives and other high-level employees. More and more, however, even run-of-the-mill workers are required to sign non-competes. For example, one well-known chain of sandwich shops requires even their sandwich makers to sign covenants not to compete once they leave the business. Such agreements are considered by many to be unfair and unnecessary restraints on the ability of employees to seek and obtain employment, or to start their own businesses.
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to issue a final rule (16 CFR Part 910) that will effectively ban most employer-employee non-compete agreements — if it survives legal challenges from the U.S. Chamber of Commerce and other opponents of the rule. Only senior executives in policymaking positions whose annual compensation is at least $151,164 may enter into non-competes with their employers. The rule goes into effect 120 days after its publication in the Federal Register.
In promulgating this rule, the FTC noted that non-competes "keep wages low suppress new ideas, and rob[bed] the American economy of dynamism, including from the more than 8,500 new startups that would be created every year once non-competes are banned."
Who is Covered by the Rule?
The final rule applies to all individuals, regardless of whether they are paid or unpaid. The term "worker" encompasses all natural persons who work or have worked, including those who fall under various employment statuses such as employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. The rule applies to individuals without any regard to their job titles or any other State or Federal laws. It is important to note that the rule encompasses all individuals who provide a service to another, regardless of their employment status or compensation.
YES, the Final Rule Affects Existing Non-Compete Agreements
The final rule, which is expected to be published in the Federal Register, would significantly impact non-compete agreements for employees who are not considered "senior executives." These are workers who earn less than $151,164 and are not in a policy-making position.
A particularly striking provision of the regulation is the requirement that employers with employees who have already signed non-competes must issue a notice to those employees informing them that the company will not enforce its non-competes against them. The regulation contains model language for such notice.
According to the rule, any current non-compete agreements that exist for these employees would be rendered unenforceable after the effective date of the final rule, which is set to take place 120 days after publication in the Federal Register. The rule does not affect non-competes entered into in conjunction with the sale of a business and does not affect cases involving non-competes that are already in litigation.
Furthermore, the final rule would prohibit any attempts to enter into a non-compete agreement, enforce an existing non-compete agreement, or represent that a worker is subject to a non-compete agreement. Essentially, the rule aims to provide more freedom to employees and limit employers' ability to restrict their employees' ability to seek employment opportunities elsewhere in the industry.
Legal Challenges Have Already Begun
Given the widespread use of non-competes, this new regulation will undoubtedly draw court challenges from businesses and business organizations. Several challenges have been made to the FTC's final rule. A complaint argues the FTC lacks the statutory authority to issue the rule or that such authority violates the U.S. Constitution. The U.S. Chamber of Commerce also plans to sue the FTC, citing the ban on employer non-compete agreements as an unlawful power grab. As these challenges continue, there is still uncertainty regarding the final rule's viability and timeline. Courts could issue orders to stay the rule during ongoing lawsuits.
When Will the Proposed Rule Go Into Effect?
As noted above, the effective date of the final rule is 120 days after publication in the Federal Register. It was published May 7, 2024 and thus becomes effective September 4, 2024. Meanwhile, the rule is subject to pending legal challenges and potentially could be enjoined by a court .
What Should Employers Do Now?
Despite the litigation challenges, companies should assess their use of non-competes and plan to take any required actions before the effective date.
The proposed rule by the FTC highlights the increasing attention given to antitrust enforcement related to employment matters. If you have any questions regarding the FTC's proposed rulemaking, non-compete agreements, or any aspect of antitrust or labor and employment law, please feel free to contact the authors of this article or any member of the firm to see how CowlesThompson might help you.
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