New Federal Rule Prohibits Enforcement of Non-Compete Agreements

Since January 2023, the Federal Trade Commission (“FTC”) has considered adopting a new nationwide rule that would prohibit employers from not only entering but also enforcing non-compete agreements with employees (subject to certain exceptions, of course). According to the FTC, non-compete agreements negatively affect competition by hindering the ability of workers t change jobs and inhibiting new business formation and innovation, which both lead to increased market concentration and higher prices for consumers. Thus, on April 23, the FTC finally adopted its new Non-Compete Clause Rule (“Non-Compete Rule”), which will go into effect on September 4, 2024.

The Non-Compete Rule adopts a blanket prohibition on employers from entering new non-compete agreements or non-compete clauses with “workers” after the effective date. Additionally, the Non-Compete Rule prohibits employers from enforcing existing non-compete agreements or non-compete clauses with “workers.” The new rule, however, creates an exception for existing non-competes with “senior executives,” which can still be enforced by employers. Once the rule goes into effect, employers are required to provide workers who have existing non-competes (except senior executives) with notice that those agreements will not be enforced against them.

In order to provide guidance for employers to comply with the Non-Compete Rule, certain terms are defined in the new rule. For instance, a worker is defined as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” In other words, the Non-Compete Rule applies to employees, independent contractors, and interns alike.

A “senior executive” is defined as a worker “in a policy-making position” who receives total annual compensation of at least $151,164. Specifically, the rule notes that the roles of president and chief executive officer are deemed to be policy-making positions. Likewise, other officers or employees who “have final authority to make policy decisions that control significant aspects of a business entity” are also considered to be in a policy-making position.

Aside from the exception for senior executives with existing non-competes, the Non-Compete Rule lists the following additional situations where the rule is not applicable:

• Non-competes entered into by someone pursuant to a bona fide sale of a business entity, of a person’s ownership interest in a business, or of all or substantially all of a business’s assets;
• Where a cause of action related to a non-compete accrued prior to the effective date;
• A non-disclosure agreement, such as a confidentiality agreement, where the prohibitions on disclosure do not apply to information that (1) arises from the worker’s general training, knowledge, skill or experience, gained on the job or otherwise, or (2) is readily ascertainable to other employers or the general public; or
• A non-solicitation agreement that does not prevent a worker from seeking or accepting other work or starting a business

While the Non-Compete Rule attempts to precisely delineate what is prohibited and clearly define certain terms, the rule and its terms are already facing criticism and challenge. Especially from corporations that will immediately lose the ability to enforce thousands of non-compete agreements when the rule goes into effect.

Employers and workers should both familiarize themselves with the new rule and follow the subsequent challenges to it. If you are unsure whether the Non-Compete Rule applies to your particular situation, contact the experienced attorneys at Rabin Kammerer Johnson at (561) 659-7878.