Employers will soon be prohibited from enforcing most non-compete agreements – and entering into new non-compete agreements in the future – based on a new rule from the Federal Trade Commission (“FTC”).
Non-compete agreements have been deemed an “unfair method of competition,” and therefore violative of the Federal Trade Commission Act, according to the FTC. The FTC described the new rule as intended to promote competition, encourage new ideas and businesses, and ensure workers’ freedoms to pursue new jobs. The FTC estimated that 30 million workers are currently subject to a non-compete agreement.
Generally, a non-compete agreement is a term or condition of employment that prohibits or prevents an employee from, and/or penalizes an employee for, seeking or accepting specified work after the conclusion of employment.
The FTC’s new rule prohibits enforcing current non-competes for all workers, except for those who are “senior executives.” Under the rule, a senior executive is defined as an employee in a “policy-making position” who earned more than $151,164 in the preceding year.
The FTC’s new ban also prohibits entering future non-compete agreements for all workers – including senior executives. However, the new rule permits non-compete agreements entered into as part of a bona fide sale of a business entity, the sale of a person’s ownership interest in a business entity, or the sale of all or substantially all of a business’s operating assets.
The FTC’s final rule becomes effective 120 days after publication in the Federal Register, which will likely occur in the coming days.
Before the effective date, employers must provide notice to workers with existing non-compete agreements, except senior executives, that informs them that such agreement will not be enforced. The FTC has provided model language for this notification, in several languages, which can be found here. Employers must provide the required notice in writing or electronically, and the notice must be clear and conspicuous.
Additionally, employers will need to evaluate their current hiring practices and any employment contracts to comply with the FTC’s new rule. Employers should further review their written policies and employee handbooks, as employers may be able to protect their business interests through other policies and agreements, such as non-disclosure, non-solicitation, and confidentiality clauses, all of which remain lawful.
Although not implicated in the FTC’s new rule, employers should also be aware of state law restrictions on non-competes, which have become more common in recent years.
K|W|W anticipates further developments on this issue will be forthcoming in the next several months, from either the FTC, or through already-filed legal challenges to this new rule. K|W|W will continue to monitor these developments. However, should you have any questions about the FTC’s new rule and how it may affect your business, do not hesitate to contact any K|W|W attorney for assistance. At K|W|W, your workforce is our priority.