Employers Have Homework to Do Over the Summer Vacation to Comply with the New Ban on Non-Compete Agreements

We previously reported to you that in order to prevent unfair competition, the Federal Trade Commission has imposed a ban on the use of non-compete agreements between almost all employers and all employees. The new rule not only prevents employers from entering into new non-competes after the effective date, but also will require employers to send notices to most workers who previously signed such agreements. The rule is slated to take effect on September 4, although, as we also explained, the many legal challenges to the rule could cause delays or a court could invalidate the rule altogether. However, as we head into the Memorial Day holiday and summer vacations, September 4th is not so far off that employers can afford to do nothing.

Assuming the rule is not permanently blocked, below are some key provisions:

• Employers must provide notice prior to September 4th to current and former workers who are not senior executives that their existing non-compete clauses will not be legally enforceable. The final rule provides model language, which can be used to satisfy this notice obligation. The model language for notification to workers includes the following: “The FTC’s new rule does not affect any other terms or conditions of your employment.” The notice may be delivered by hand, by mail to the worker’s last known address, by email at any email address belonging to the worker or by text message to a mobile telephone belonging to the worker.
• Non-compete clauses cannot be enforced against workers who are not senior executives. The final rule removed a provision that would require existing agreements to be rescinded.
• Employers must refrain from entering into new non-compete clauses with workers who are not senior executives.
• Attempting to enforce an existing non-compete clause, entering into a new one, or claiming that a worker is subject to a non-compete clause constitutes unfair competition for non-senior executives.
• For senior executives, attempting to enter into a new non-compete clause or claiming they are subject to one (if the agreement is entered into after the rule’s effective date) constitutes unfair competition.

The definition of a “non-compete clause” is quite comprehensive and encompasses any contractual term, written or oral, that prohibits or penalizes a worker from seeking or accepting work from a different entity or starting their own business within the U.S. after their employment ends.

The rule does not prohibit non-solicitation, non-recruit, or confidentiality clauses, so long as they do not function to prevent someone from seeking work or operating a business. In essence, if the non-solicitation, non-recruit, or confidentiality clauses are not so overbroad as to effectively prevent someone from working for another employer in the same industry or field, they should pass muster.

The FTC goes on to note that certain agreements — including TRAPs, bonus repayment clauses, and garden leave provisions — do not necessarily constitute non-competes, but a forfeiture-for-competition clause that “penalizes” a worker as a result of the termination of an employment relationship, so the employee can seek or accept other work or start a business after their employment ends is prohibited. The FTC seemed to indicate that any provision that appears on the surface to be triggered when the worker is seeking to work for another person or start a business after they leave their job is no longer allowed.

The FTC has the authority to issue a complaint in situations where it believes its rules have been violated. If a respondent contests the charges, the complaint is adjudicated before an administrative law judge (ALJ) in a trial-type proceeding. Upon conclusion of the proceeding, the ALJ issues an “initial decision” setting forth findings of fact and conclusions of law and a recommendation for either a “cease and desist” order or dismissal of the complaint. Either side may appeal the initial decision to the full Commission. After the Commission issues a final decision, the matter may be appealed in court. If a cease-and-desist order is finalized, and an employer does not comply with the order, the Commission may seek an assortment of remedies including civil penalties, restitution, damages, injunctive relief, or reformation of contracts. Additionally, the FTC may also make referrals to the U.S. Department of Justice for criminal prosecution.

It is important to note that the new rule does not apply to a non-compete clause entered into pursuant to a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Also, the rule does not apply to franchisees in the context of a franchisee-franchisor relationship.

Additionally, employers that are beyond the scope of the FTC’s regulatory authority are not covered by the rule, including, for example, non-profits and federally regulated banks and credit unions.

The rule does not apply to a senior executive who entered into a non-compete prior to the effective date.
The rule defines a “senior executive” as a worker who (1) was in a policy-making position; and (2) received total annual compensation of at least $151,164 in the preceding year. The term “policy-making position” means a business entity’s president, CEO, or the equivalent, or any other officer of a business entity who has policy-making authority, or any other person who has policy-making authority for the business entity similar to an officer with policy-making authority. The definition states that an “officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph,” but that a “ person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.” “Policy-making authority” is defined as having “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.” The Commission offers some examples of positions that would not be considered “senior executives,” including the head of a marketing division in a manufacturing firm, where that person only makes policy decisions for the marketing division.

According to the Commission, to be a “common enterprise,” an entity must include “integrated business entities,” meaning that the various components of the common enterprise would have, for example, “one or more of the following characteristics: maintain officers, directors, and workers in common; operate under common control; share offices; commingle funds; and share advertising and marketing.”

In order to start preparing for the implementation of the new rule, we suggest that you go back and review our post of April 25, 2024, and start putting together a list of all your current employees that have signed non-compete agreements, as well as those employees that left the Company with a non-compete and the time for the non-compete to be in effect has not expired. Then find for each an email or actual address to which you can send any notice. Feel free to call us if you have any questions or need assistance in putting together your notice to employees  404.844.4130.