FTC’s Final Rule Eliminates Non-Competes Going Forward

Fast Facts:

• Final rule will be effective 120 days from the date it is published in the Federal Register (assuming there is no injunction or stay issued from current litigation);

• The rule bans all non-competes going forward, and permits non-competes existing prior to the effective date only for Senior Executives, as defined in the rule.

• There is an exception for the sale of a business, as articulated in the rule.

As many of you may have heard over the last few months to a year, the Federal Trade Commission (FTC) released a proposed rule that would have banned non-competes. Last week, on April 23, 2024, the FTC released its final rule. Despite months of comments from several protesting, the final rule prohibits employers to enter into non-competes with any  worker once the rule is in effect – 120 days after it is published in the Federal Register. Notably, worker is defined far broader than employee – it specifically excludes consideration of classification under any State or Federal laws and specifically includes all natural persons whether an “employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

What Exactly Does the FTC Mean by Non-Compete?

Importantly, the FTC’s definition of non-compete may be broader than its often used. It defines a non-compete as:

any term or condition that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from. . .

seeking or accepting work in the United States with a different person where such would begin after the conclusion of the employment that includes the term or condition; or

operating a business in the United States after the conclusion of the employment that includes the term or condition.

While the FTC indicated it did not intend to “categorically prohibit other types of restrictive employment agreements, for example, NDAs [non-disclosure agreements], TRAPs [training-repayment agreements], and non-solicitation agreements,” the FTC clarified if “an employer adopts a term or condition that is so broad or onerous that it has the same functional effect” as a non-compete, it would be prohibited. For instance, forfeiture for competition agreements. In these, an employee is permitted to go to a competitor, but the employee does, they will be required to forfeit a certain amount of compensation, including a severance payment. Despite courts routinely holding that such clauses do not prevent competition, and are permissible, the FTC stated in the final rule they would find such provisions to be a penalization for competition, and as such, the FTC would likely believe these would be prohibited under the final rule.

Some industries, for instance, Wall Street, have long employed the idea of a garden leave where an employee remains employed in name, and continues to receive pay, but is not required or permitted to actually work during that time. The FTC has stated this would not violate the final rule, provided the worker is:

• Still employed; AND

• Receiving the same total annual compensation and benefits on a pro-rata basis.

What is not clear is if an employee quits during this garden leave or refuses to comply with it, whether an employer could seek to enforce it.

What About Non-Competes Signed Before the Effective Date of the Final Rule?

Additionally, the final rule restricts enforcement of non-competes signed prior to the effective date of the final rule only to “Senior Executives.” Senior Executive is defined as an individual who: 

• Earns more than $151,164 per year; AND

• Is/was in a “policy-making position”

Unfortunately, the FTC’s definition for “policy-making position” leaves a lot to interpretation, and is likely to be fodder for litigation as employers attempt to take a liberal reading of the term, and presumably, FTC will take narrower (albeit ill-defined) view. Notably, the FTC has estimated that less than 1% of workers will qualify as a Senior Executive. The FTC defines “policy-making position” as:

a business entity’s president, chief executive officer of the equivalent, any other officer of a business entity who has policy-making authority  or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. 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. A natural 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” being the pivotal issue, the FTC also defined that term

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 actual meaning of the definitions appear poised for debate. Specifically, with respect to the meaning of:

• “final authority”

• “policy decisions”

• “significant aspects”

Regardless, it appears that many individuals, many of whom are often, and until now, reasonably, required to sign non-competes, will be exempted from their signed non-compete agreements. For instance, a high level, long time sales executive, without any policy-making authority, or a high-level finance individual with vast knowledge of client pricing information and profit/loss margins, assuming they have no policy-making authority.

Wait, What About Non-Competes in the Sale of a Business?

What appears to be the only silver lining in the final rule, seemingly a result of the FTC listening to the comments provided, is that the final rule (unlike the original proposed rule) does except non-competes entered into during a business sale.

So now what?

At the extreme risk of sounding like a stereotypical lawyer, it depends. If the rule goes into effect, employers will be required to cease using non-competes in all cases, other than a sale of business. Likewise, it would not be permitted to enforce their already existing non-competes with current employees or those have departed and are still within the restricted period. Additionally, the final rule requires employers to notify all employees who have received a non-compete that would be rendered unenforceable by the final rule.

However, before you start pulling all of your contracts and start making phone calls, it is possible that this final rule may never come to fruition. The final rule is already facing legal challenges regarding the FTC’s authority to enact the rule, and very well may face more. A court could issue an injunction staying the enforcement of the final rule until the legal battle is resolved. This would mean the effective date of the final rule would be pushed out, and employers would not have to comply until the new effective date. Additionally, the FTC’s authority applies only to for-profit institutions, so non-profit organizations will not be required to comply with these restrictions.

The bottom line, however, is non-competes continue to be highly scrutinized by various sources, and although a near total ban like the final rule may not ultimately stick, employers should be carefully selecting those employees who are subject to a non-compete, and narrowly tailoring those agreements. Employers may also want to begin considering garden leave for those key employees who may not otherwise fall into the Senior Executive definition.

 If you are an employer who has questions about non-competes or this new rule, contact ELS for more information.