Commonly Asked Questions About the Federal Trade Commission’s Non-Compete Ban

On April 23, 2024, the Federal Trade Commission (“FTC”) published its Final Non-Compete Clause Rule (“Final Rule”), which bans post-employment non-compete clauses between employers and their workers. Absent judicial intervention—a distinct possibility—the Final Rule goes into effect September 4, 2024.

What Does the Final Rule Provide?

Generally speaking, the Final Rule prohibits an employer from entering into, or attempting to enter into, a non-compete clause with a “worker” (including, e.g., employees and independent contractors) or representing that a worker is subject to a non-compete clause.

The Final Rule defines “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 (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

Are There Any Exceptions in the Final Rule?

Yes, the non-compete ban does NOT apply in the following situations:

1. The Final Rule allows employers to maintain existing non-compete agreements with “senior executives,” (i.e., those with over $151,164 annual compensation and in a policy making position for the business) but bars an employer from entering into, or attempting to enter into, a non-compete clause with a senior executive after September 4, 2024.

2. The Final Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.

3. The Final Rule does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause accrued prior to September 4, 2024.

4. The Final Rule does not apply to con-competes between a franchisor and a franchisee.

5. The Final Rule does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.

Are Nonprofit Organizations Covered by the Final Rule?

No. By statute, the FTC only has authority over for-profit enterprises, so the Final Rule does not apply to nonprofit organizations.

Does the Final Rule Supersede State Non-Compete Law?

Yes, the Final Rule supersedes all state laws to the extent, and only to the extent, that a state’s laws permit or authorize conduct prohibited under the Final Rule or conflict with the Final Rule’s notice requirements.

What Notice Requirement Does the New Rule Impose on Employers?

The Final Rule requires an employer to provide clear and conspicuous notice to workers subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. Model notice language is included in the Final Rule.

Employers must provide notice by September 4, 2024 by either hand-delivery, mail at the worker’s last known street address, email, or text message.

Does the Final Rule Also Prohibit Non-Disclosure and Non-Solicitation Agreements?

No, while the Final Rule bans almost all non-competes between employers and workers, it does NOT prohibit non-disclosure agreements, non-solicitation agreements with respect to customers or employees.

However, the Final Rule does make it clear that it bans these types of restrictive covenants when they have such a broad effect on the worker that its application and enforcement would have the same functional effect as a non-compete agreement.

What Happens Next and What Should Business Owners Do?

There are several lawsuits pending in federal courts challenging the Final Rule, and many legal commentators believe one or more of these legal challenges will be successful. However, the judicial process may take up to 12-18 months before the U.S. Supreme Court issues a final ruling.

Business owners should: (i) carefully follow whether the Final Rule is enjoined by a federal court and monitor the deadline for compliance (September 4, 2024) should the Final Rule survive judicial scrutiny; (ii) prepare to send the required notices if the Final Rule becomes effective by compiling a list of applicable current and former employees with relevant contact information (but do not send notices right away); (iii) determine whether any of the impacted employees qualify for the “senior executive” exception described above; (iv) evaluate whether there are “senior executives” who should sign non-competes prior to the Final Rule’s effective date.

Reach out if the Perkins Law team can answer questions about the Final Rule or be of assistance with your small business compliance and transaction needs.