Prepare for Competition: New FTC Non-Compete Clause Rule
On April 23, 2024, the Federal Trade Commission (FTC) made a pivotal announcement, instituting a nationwide ban on new noncompetes for all workers, encompassing both 1099 independent contractors and W-2 employees. Not only does this ban apply to future non-competition agreements, but it works retroactively, rendering existing noncompete unenforceable (there is an exception for narrowly-defined “senior executives”). In this article we break down what business and medical practice owners need to know about the new FTC Non-Compete Clause Rule.
What is a noncompete clause?
The term “noncompete” encompasses more than the traditional employment noncompetition clause. As defined by the Non-Compete Clause Rule, it encompasses any term or condition of employment that prohibits or penalizes a worker from seeking or accepting work with a different entity or operating a business in the United States after the conclusion of their employment. This includes contractual terms, workplace policies, or any other agreements, whether written or oral. Employers should be cautious, as even employment agreements, handbooks, or policies containing noncompetition language could fall under this definition.
Background: Pushback for Noncompete Clauses
Employers have traditionally relied on noncompetes to safeguard their investments in employee training and development. Recent years have seen a significant pushback against noncompetes in the United States, with lawmakers enacting bans for workers under 18 years old, those below a certain income threshold, and certain professions where noncompetes could exacerbate labor shortages, such as in the healthcare industry.
When does the ban on noncompetes effective?
The Non-Compete Clause Rule becomes effective 120 days after Federal Register publication. However, there are likely to be legal challenges contending its constitutionality. Employers should consult with legal experts to understand the current status of the rule's enactment process.
How will this new rule affect existing noncompetes?
The new rule renders all existing noncompetes between employers and their workers unenforceable, with the aforementioned narrow exception for senior executives meeting specific criteria. Going forward, senior executives cannot be subject to noncompetes.
Note that the rule does not affect noncompetes entered into by a person pursuant to the sale of a business.
Are employers required to notify workers who are currently under non-competes of the change in this rule?
Yes! Employers must provide workers with existing noncompetes that they are no longer enforceable. The FTC provides model language for this notification, but consulting with legal counsel is advisable to ensure compliance.
What will happen in states that already restrict noncompetes?
The new rule does not limit or affect enforcement of state laws that restrict noncompetes where the state laws do not conflict with the rule. For states like California, that already have noncompete bans in place, the new FTC rule does not affect existing regulation. While California banned noncompetes in 2023, employers should still seek legal guidance to navigate any differences in compliance requirements between state and federal regulations.
What do employers need to do to prepare for this rule?
To prepare for the forthcoming Non-Compete Clause Rule, employers need to take proactive steps:
Review and Update Existing Employee Contracts, Policies and Procedures: Assess all current employment agreements, handbooks, and policies for any noncompete language. Identify agreements that may need to be revised or terminated in light of the new rule.
Identify and Notify Affected Workers: Determine which employees are currently bound by noncompete agreements and prepare to notify them of the upcoming changes.
Consult Legal Counsel: Seek guidance from legal experts to ensure compliance with the new rule.
Stay Informed: Keep abreast of developments regarding the rule's enactment process and any potential legal challenges. Stay informed about state-specific regulations, especially if operating in jurisdictions with existing and more comprehensive noncompete bans.
By taking these proactive measures, employers can effectively navigate the transition brought about by the Non-Compete Clause Rule and ensure compliance. If you need guidance updating or reviewing existing contracts (or support moving forward) reach out to our team.
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