Employers: Are you Prepared for the FTC’s Rule Prohibiting Most Non-Compete Agreements?

On April 23, 2024, the Federal Trade Commission (“FTC”) announced its final proposed rule effectively banning most non-compete clauses in employment. While the final rule does not take effect until September 4, 2024 and its legality is currently being challenged in court, employers using non-compete agreements should prepare for a significant shift in post-employment restrictions.

If the rule goes into effect as-is, it will ban non-competes for all workers in the United States, with limited exceptions. These exceptions include carve-outs for non-profit entities, non-competes tied to a bona fide sale of a business, and agreements with senior executives earning at least $151,164 a year who meet a specified job duties test outlined in the final rule. Note that after the rule’s effective date, new non-compete agreements with these senior executives will be prohibited.

Employers using non-competes in their business must notify current or former employees that are subject to a non-compete prior to the rule’s effective date (so long as the employer has contact information for the employee). The notice must:

1. advise the worker that their existing non-compete will no longer be enforced.
2. identify the person who entered into the non-compete clause with the worker.
3. be provided via mail, email, or text message to the worker.

The FTC has provided model notices for employers to use here:

The final rule does not apply to other restrictive covenants, including non-solicitation provisions, non-disclosure agreements, and other confidentiality clauses. However, the FTC notes that the final rule is intended to prohibit any provision that will effectively operate as a non-compete. For instance, a non-solicitation provision so stringent that it effectively prevents a worker from working for another employer in the same field would be considered a prohibited non-compete clause.

Even if the final rule is enacted, it will not prevent an employer from bringing a claim for violation of a non-compete if the cause of action occurred prior to the effective date of the final rule. In other words, if an employer uncovers a violation of an existing non-compete prior to September 4, 2024, they can still seek legal relief.

Given the legal challenges and uncertainties surrounding the final rule, employers should still prepare as though the final rule will be implemented. This includes:

1. compiling a list of all current and former employees with active non-compete
2. confirming contact information.
3. preparing the required notices for each individual.

Employers should also monitor the court cases challenging the FTC’s final rule to monitor any changes in its effectiveness or timing.

If you have any concerns about the impact this may have on your business or any other employment related issues, please reach out to your contact at Mansour Gavin or one of our Labor and Employment attorneys.