Introduction
On April 23rd, 2024, the Federal Trade Commission (FTC) issued a groundbreaking ruling that effectively bans employers from creating or enforcing non-compete clauses on their workers. While this ban doesn’t apply to every non-compete clause, its overarching goal could either benefit or challenge business owners in the United States. This post will explore the specific rulings made by the FTC and how they will affect business owners and their relationships with key employees when they become enforceable later this year.
Understanding Non-Compete Clauses
What Is a Non-Compete Clause?
The FTC defines a non-compete clause as:
“A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from 1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or 2) operating a business in the United States after the conclusion of the employment that includes the term of condition.”
In simpler terms, a non-compete clause restricts a worker from gaining employment or starting a business after leaving their current employer. For example, if you worked at a national sandwich shop chain, a non-compete clause might prevent you from working at another sandwich shop within three miles for two years after leaving your job.
Who Is Affected?
A non-compete clause can be applied to any worker, including employees, contractors, interns, and volunteers. The only exception is in franchise-franchisor relationships. The FTC’s broad definition of a worker could have significant implications for employers’ ability to protect their interests. For a detailed overview of who qualifies as a worker under the FTC ban, refer to our article “Who Qualifies as a Worker under the FTC Non-Compete Clause Ban and How that Affects Business Owners.”
The FTC’s Ruling on Non-Competes
Unfair Competition
The FTC has deemed non-compete clauses as an “unfair method of competition,” violating Section 5 of the FTC Act. Essentially, the FTC’s ruling invalidates the formation or continued use of non-compete clauses against most employees.
Major Exceptions
- Senior Executives:
- Non-compete clauses are still valid for senior executives earning more than $151,164 annually and holding policy-making positions.
- Bona Fide Business Sales:
- When a business owner sells their entire business, non-compete clauses for the previous owner remain valid to protect the new owner’s interests.
These exceptions mean that while most non-compete clauses will become null and void by September 4th, 2024, certain high-level agreements will persist.
Non-Workers
Non-competes between businesses, not involving workers, remain valid under the new rule.
Alternative Protections for Companies
Even though the FTC is banning non-compete clauses, other options exist for protecting company interests:
- Non-Disclosure Agreements:
- Prevent employees from sharing confidential business information.
- Non-Solicitation Agreements:
- Prohibit former employees from soliciting clients or employees from their previous employer.
- Trade Secret Laws:
- Protect proprietary information crucial to a business’s competitive edge.
Economic and Worker Rights Impact
The FTC believes that banning non-compete clauses will benefit the economy and worker rights. Key reasons include:
- Reduced Economic Harm:
- Removing barriers that prevent workers from seeking better employment opportunities.
- Increased Business Creation:
- More workers having the freedom to start their own businesses.
- Enhanced Innovation:
- Potentially boosting patent development.
- Higher Earnings:
- Allowing workers to negotiate better salaries.
While these benefits sound promising, the actual impact remains to be seen once the ban is enforced.
Employer Obligations
Notice Requirement
Employers must notify workers that their non-compete agreements will not be enforced post-September 4th, 2024. This notice must be delivered through one of the following methods:
- Hand delivery.
- Mail to the worker’s last known address.
- Email to the worker’s last known email address.
- Text message to the worker’s last known mobile number.
Refer to our article “Employer’s Tasks to do Following FTC Non-Compete Clause Rule Enactment” for a detailed guide.
Potential Unconstitutionality
If the FTC ban is found to be unconstitutional, regaining the original non-compete language may be difficult. Employees could defend themselves using legal doctrines like detrimental reliance or other exceptions.
For more details, read “How to Solve Issues Relating to the Waiving of Non-Compete Clauses following Potential FTC Ban Reversal” on our blog page.
Final Thoughts
To prepare for the FTC’s non-compete clause ban:
- Identify senior employees who fall within the exceptions.
- Prepare to notify all current and past employees under non-compete clauses.
- Monitor related lawsuits for updates on the rule’s application.
Consult with your business attorney to ensure compliance with the new regulations.
By staying informed and proactive, you can successfully navigate the challenges and opportunities presented by the FTC’s non-compete clause ban.
Want personalized guidance? Schedule a consultation with a legal expert today.
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