Introduction
On April 23, 2024, the Federal Trade Commission (FTC) made a groundbreaking announcement with the unveiling of its new rule banning non-compete agreements. In this article, we dissect the key provisions of the new rule and analyze its potential impact on businesses and employees.
Ban and Key Exceptions
The Final Rule casts a wide net, prohibiting employers from entering into or attempting to enter into non-compete clauses with workers, including both employees and independent contractors. However, there are a few exceptions:
Senior Executives Exemption: This exemption allows employers to maintain existing non-compete agreements with senior executives, defined as those with over $151,164 in annual compensation and holding policy-making positions. It is worth noting this exemption does not extend to new agreements.
Bona Fide Sale of Business: Non-compete agreements entered into as part of a bona fide sale of a business entity are exempted from the rule.
Non-Competes Accrued Prior to Effective Date: The new rule does not apply to non-compete agreements where the cause of action accrued before its effective date (September 4, 2024). This means that if an employee breached the non-compete before September 4, 2024, the new rule would not prevent a lawsuit from moving forward against the employee for the breach.
Issues with NDAs & Non-Solicitation Agreements
The ban is worded so broadly that it extends beyond just non-compete agreements to encompass other employment related restrictions, such as non-disclosure agreements (NDAs), which prohibit the disclosure of sensitive information, and non-solicitation agreements, which prevent employees from trying to poach the employers’ clients when they leave. Below are examples in each context:
Non-Disclosure Agreements (NDAs): If an NDA restricts disclosure of information in a way that effectively prohibits workers from utilizing their skills and expertise in the same field after leaving their job, it will be subject to the rule's restrictions. Employers must therefore exercise caution when drafting NDAs to ensure they do not inadvertently fall within this prohibition.
Non-Solicitation Agreements: Similarly, non-solicitation agreements will be prohibited if, for example, they prevent workers from seeking or accepting employment opportunities from the employer’s customers. Employers should review their non-solicitation agreements to ensure compliance and mitigate potential legal risks.
In sum, if there is any term of employment that would have the effect of preventing the employee from seeking or accepting work or operating a business, that would fall within this prohibition and would be unenforceable.
Notice Requirement
One of the most critical aspects of the new rule is the requirement for employers to provide clear notice to workers subject to prohibited non-compete clauses by the effective date of the new rule, which is currently September 4, 2024. This notice serves to inform affected workers that their non-compete clause will not be legally enforced against them. Businesses should have their employment agreements and any related restrictions reviewed by an attorney to determine what notices are required, and to ensure notices comply with the FTC’s requirements.
Conclusion
Employers need to carefully review and potentially revise their existing employment agreements, as well as provide the required notices. Given the complexity and potential legal implications of this new rule, business owners are strongly encouraged to consult with an experienced attorney to ensure compliance and mitigate risk.
Schedule a free attorney consultation with Glide Legal today to discuss these issues with an experienced business attorney.
