On April 23, 2024, the FTC issued a final rule banning non-competes (see pages 561-568) for employees nationwide. The FTC estimates this decision will affect around one fifth of the U.S. workforce, or 30 million people.
The rule will go into effect 120 days after its publication in the Federal Register. Publication is scheduled to occur on May 7, 2024, making the effective date September 4, 2024. Several lawsuits have already been filed challenging the new rule and its future is uncertain. Our in-house Legal Product team at SixFifty expects non-compete law to be in flux for the foreseeable future.
Regardless, employers should prepare to comply with the rule by the effective date, and you may be left having to comply with the current patchwork of state non-compete laws if the rule is delayed during litigation or ultimately found invalid.
Here’s what you need to know about the non-compete ban:
The basics of the final rule
This rule completely shifts the non-compete landscape in the U.S. and institutes a nearly categorical ban. Going forward, all post-employment non-competes are banned unless they’re executed in conjunction with the sale of a business. The rule also applies retroactively, banning all existing non-competes. Note that only the non-compete provision will be voided, not the entire agreement.
It’s hard to overstate what a radical departure this is from existing law. On their own, states have been regulating non-competes with increasing frequency, but this rule goes much further than most states have dared.
The scope of the nationwide non-compete ban
This new rule is strikingly broad in scope. Going forward, it applies to nearly all workers equally; the Pfizer CEO and the Walgreens pharmacy tech are treated identically.
The rule also goes further than banning traditional non-compete agreements: It expands the definition of a “non-compete” to other types of restrictive covenants that are written broadly enough that they function as de facto non-competes. In other words, it bans any term or condition of employment that prohibits, penalizes, or prevents a worker from:
- Seeking or accepting other post-employment work in the U.S., or
- Operating a business in the U.S. after the conclusion of employment
This prohibition could apply to non-solicitation agreements, no-poach agreements, and even some non-disclosure agreements. Our employment law team will be monitoring how the FTC enforces the rule and how courts interpret this ambiguous definition of “non-compete.”
Retroactivity and notice requirements
Further, this new rule applies both prospectively and retroactively, meaning that any offensive agreement currently in existence or signed going forward is unenforceable, with one exception: Non-competes already executed with senior executives are not voided and will be permitted to run their course.
Senior executives are those who are in a policy-making position and received compensation of:
- At least $151,164 in the preceding year, or
- At least $151,164 when annualized, if the worker was employed during only part of the preceding year,
- At least $151,164 when annualized in the preceding year prior to the worker’s departure, if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause
Under this rule, employers who already executed non-competes with their employees are required to rescind those agreements within 120 days of the publication of the rule in the Federal Register. Employers must also provide “clear and conspicuous notice” to the employee or ex-employee by the rule’s effective date that their non-compete clause will not be, and cannot legally be, enforced against them.
This notice must be delivered to the affected worker either in person, by mail at their last known personal street address, or by email (including the worker’s current work email address or last known personal email address), or by text.
Preemption of state non-compete bans
Finally, this federal rule expressly preempts any state law that doesn’t provide protections at least as significant as those it provides. If a state provides more or stronger protections, those provisions will be honored.
Next steps for employers and HR leaders
For employers who have ever used non-compete agreements, the first step is to entirely discontinue your use of non-compete agreements going forward (though you don’t need to do this quite yet; you still have 120 days from the date of publication). This will likely require you to review any form agreements you have and check whether they contain non-compete provisions or other restrictive covenant clauses that need to be narrowed or removed.
You may also want to take advantage of this time to review and implement other means of protecting your trade secrets, like installing data protection software, executing other protective agreements like NDAs, or developing and administering trade secret and data security training. The Sedona Conference’s Commentary on Protecting Trade Secrets Throughout The Employment Life Cycle and the Beck Reed Riden Primer and Checklist for Protecting Trade Secrets andOther Legitimate Business Interests are two helpful resources to help you think through your options.
Next, you will need to determine whether you need to rescind any existing non-compete agreements you have and to send notice to affected employees or ex-employees of the rescission. If you would like to maintain your non-competes where possible, you will need to determine whether any of your employees who are subject to a non-compete satisfy the “senior executive” definition; those are the only employees whose non-competes aren’t automatically voided. You still are prohibited from executing new non-competes with them, though.
Finally, you should keep your eye on any legal updates about this new rule, as it is certain to be challenged in court. The U.S. Chamber of Commerce has already committed to challenging this rule, and there are unquestionably more to follow suit.
If you would like more information about this new rule and its implications, join our webinar on May 1, 2024, where we’ll be breaking down the rule and its implications in more depth and answering your questions.
Staying on top of non-compete law updates
If you’re concerned about your ability to monitor updates to federal non-compete on your own, don’t worry—we live and breathe employment law and are here to help!
The Employment Agreements toolkit within SixFifty’s Employment suite includes non-compete agreements that comply with every state and federal law. As our Legal Product team of employment lawyers continues to monitor this situation, we’ll update our non-compete products so you can stay informed of any new allowances or restrictions you face, push changes to your employment docs, and notify your employees in a timely manner.
To help employers who are now required to send out a rescission notice, we have created a tool to generate a compliant written notice tailored to you and your individual employees. Because the rule’s effective date relies upon its publication in the Federal Register, that tool will be available once that publication occurs.
Non-competes are just one aspect of the complex process of managing a multi-state workforce. Our easy-to-use software platform helps you generate the documents you need to manage and hire employees in every jurisdiction across the country. For more information, or to see our document generators in action, request a demo with our team.
