When the Federal Trade Commission (FTC) released its final ruling on the ban of non-compete clauses, it provided a comprehensive definition of what constitutes a “worker.” This definition is crucial for employers, HR executives, small business owners, and anyone who might need to consult an attorney on these matters. This article will break down the FTC’s definition of “worker,” the exceptions to this definition, and the potential impact on business owners.
Who is a “Worker” Under the FTC Non-Compete Clause Ban?
Under §910.1(f) of the Non-Compete Clause rule published in the Federal Register on April 23rd, 2024, a worker is defined as:
“a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.”
This broad definition covers nearly every type of worker in the United States, from employees and independent contractors to interns and volunteers. The FTC received numerous comments about the broadness of this definition but maintained its stance with several arguments for why it should remain inclusive.
Inclusion of Independent Contractors
One of the FTC’s key arguments for including independent contractors in the definition is that the distinction between employees and independent contractors does not affect employers’ ability to exploit imbalances of bargaining power. Therefore, excluding independent contractors would not protect them from potential exploitation. The FTC also noted that there wasn’t sufficient evidence to justify excluding independent contractors, sole proprietors, and others from the definition.
Impact on Business Owners
The inclusion of such a wide range of workers might seem detrimental to small business owners who rely on non-compete clauses to retain talent. However, the FTC argued that non-compete clauses generally harm both workers and businesses by limiting fair competition and job opportunities. Some small businesses even reported struggling to hire talented workers because of existing non-compete clauses.
Senior Executives with Existing Non-Competes
Senior executives are the major exception to the FTC’s definition of “worker.” A senior executive is defined as a worker who:
- Was in a policy-making position; and
- Received total annual compensation of at least $151,164 in the preceding year or an equivalent amount if employed for only part of the year.
This exception is based on the rationale that senior executives possess valuable trade secrets that could harm their former employers if disclosed to new companies. Therefore, current non-compete clauses for senior executives can remain in effect after the ban is implemented on September 4th, 2024. However, no new non-compete clauses can be enacted for senior executives after this date.
Positive and Negative Impacts on Business Owners
The broad definition of “worker” and the ban on non-compete clauses could have both positive and negative effects on business owners:
Positive Impacts
- Increased Talent Pool: With non-compete clauses out of the way, businesses may find it easier to hire talented workers who were previously restricted.
- Fair Competition: The removal of non-compete clauses promotes fair competition in the market, which can be beneficial for innovation and growth.
Negative Impacts
- Loss of Competitive Edge: Small businesses worry that without non-compete clauses, they could lose employees to larger competitors, along with valuable knowledge and skills.
- Uncertain Outcomes: While the FTC argues that the impact will be more positive than negative, the true effects will only become clear once the ban is in place.
Conclusion
The FTC’s broad definition of “worker” aims to encompass nearly every type of worker, thus offering widespread protection from non-compete clauses. While senior executives with existing non-competes are exempt, the ban on new non-competes for all workers, including senior executives, will come into effect on September 4th, 2024.
If you have any questions about whether you qualify as a worker under the FTC’s definition or need further clarification on the non-compete clause ban, it’s advisable to consult with a business lawyer.
For more information and updates, stay tuned.
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