What The FTC’s Ban on Non-Compete Clauses Means for Employers and Employees

The Federal Trade Commission (FTC) has adopted a final rule that operates to ban non-compete clauses nationwide for the vast majority of workers in the United States. The effective date of the rule is 120 days after publication in the Federal Register, which has not yet occurred.

The final rule deems it an unfair method of competition for an employer to enter into a non-compete clause with workers on or after the rule’s effective date, and it voids non-compete provisions that predate the final rule. The term “worker” is defined broadly to include employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide service to a client or customer, and natural persons who work for a franchisee or franchisor.

“Senior Executives” (defined as workers earning more than $151,164 who are in a “policy-making position”) are partially exempted from the final rule’s ban on non-competes. Such “senior executives” can remain bound by existing non-competes, but even they cannot be made subject to a new non-compete on or after the effective date of the final rule. The definition of “senior executive” is intended to target workers at the highest levels of a business entity, i.e., CEOs, presidents, and other high-level corporate officers with final policy-making authority over significant aspects of a company. The final rule also has a carveout for bona fide sales of a business.

What constitutes a “non-compete clause” under the final rule? The final rule defines a non-compete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The final rule therefore bans not only explicit non-compete clauses, but also clauses and policies that function as non-competes because they have the effect of prohibiting a worker from undertaking new employment. Notably, the final rule is not limited to non-compete clauses in employment agreements—it extends to workplace policies, both written and oral, that have the same effect as a non-compete agreement.

Although the final rule does not explicitly prohibit non-disclosure agreements (NDAs) and non-solicitation agreements, the “functions to prevent” provision in the final rule means that some NDAs and non-solicitation agreements may be void if they are written so broadly as to effectively prevent an employee from undertaking new employment. For example, if an NDA prevents an employee from disclosing any information that “relates to” the industry in which they work, such a provision would effectively prohibit that worker from getting a new job in that industry. Likewise, an NDA that prohibits an employee from disclosing information the employee obtained during their employment, regardless of whether that information is publicly available, would function to prevent the employee from working for another company in the same field; such a provision would therefore be void under the final rule.

What must employers do if they have existing non-competes with their workers? The final rule requires employers to provide clear and conspicuous notice to workers (including former employees) by the rule’s effective date that the employer will not enforce any non-compete clause against the worker. The notice must identify the parties to the non-compete and be hand-delivered to the employee, mailed to the employee’s last known personal address, emailed to the employee at a current work email address or last known personal email address, or sent by text message to the employee’s cell phone number. The final rule provides model language that employers can use to provide the requisite notice.

If you have questions about the FTC’s non-compete ban and how it might impact your business, employment, or other restrictive covenants, give us a call and we would be happy to guide you through this drastic change in the employment law landscape.

Laura B. Kirshenbaum is an experienced litigation attorney and leader of Rose Law Partners’ Employment Law Practice. This article is intended for information purposes only and does not constitute legal advice nor is it intended to create an attorney-client relationship. For questions about your specific legal issues, contact Laura at lbk@rose-law.net.