Earlier this week, the Federal Trade Commission (“FTC”) voted to approve a rule that bans — with limited exceptions — non-compete agreements for all workers in the United States. Under the FTC’s rule-making process, the rule will go into effect four months after the date it is published in the Federal Register. It has not yet been published in the Federal Register, so the earliest the rule could go into effect is early September 2024. Litigation may subject the rule to further delay; the day after the FTC issued the rule, the U.S. Chamber of Commerce filed a lawsuit in the Eastern District of Texas, challenging the FTC’s authority to issue the rule. It is possible that the litigation will not just delay the implementation of the rule but prevent it from ever going into effect.
The FTC’s rule is a significant development, but if or when it does go into effect, most (but certainly not all) New York employers that seek to use non-compete agreements will likely see little practical change to the enforceable scope of their non-compete agreements.
The rule broadly bans non-compete clauses as “a term or condition of employment that prohibits … [or] penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work … 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 rule does certain categories of workers, and expressly provides that certain traditional categories of non-compete agreements will remain enforceable, provided that they do not effectively function to prevent a worker from accepting work or operate a business after their employment ends. Subject to that qualification, permissible categories of non-compete agreements include confidentiality restrictions, provisions that restrict the solicitation of customers that the employee worked with, restrictions on soliciting former coworkers, and garden leave provisions.
By its terms, the new rule does not apply to the following categories of workers:
The new rule does not apply to non-profit entities, banks, common carriers, and air carriers because they are not within the FTC’s jurisdiction, provided that such an entity meets the applicable standard to be considered such an entity under the FTC’s rules and applicable law. The FTC created the exceptions for “senior executives”. The rule will also not apply to non-competes entered into in connection with a bona fide sale of a business. Nor will it apply to a lawsuit that has already been filed at the time the rule goes into effect over an alleged breach of an existing non-compete.
Once the rule goes into effect, only employers in industries that exist outside of the jurisdiction of the FTC (see above) can have employees sign a new non-compete agreements.
For employees in the industries outside of the jurisdiction of the FTC, currently existing non-compete agreements will remain enforceable. Outside of that, only those employees classified as “senior executives” (those senior-executives with policy-making positions who earn more than $151,164 annually) with non-compete agreements already in place may have their non-compete agreements remain in place.
For any other employees, an employer will need to notify their employees that their existing non-compete agreement or provision is not enforceable. The FTC has drafted model language with which employers may alert their employees that their non-competes are no longer enforceable, or employers may use their own.
It depends on what the garden-leave provision provides. If the garden-leave provision provides that (1) the worker is still employed and (2) receives the same total annual compensation and benefits on a pro rata basis as when fully engaged by the employer, the FTC will not be considered a non-compete clause. The FTC reasons that a provision that meets these criteria is not a post-employment restriction because the worker continues to be employed — “even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed.” Employers will need to carefully draft garden leave provisions and consider the implications for separation and release agreements.
Yes. The FTC does not consider a “garden-variety” nondisclosure agreement or “NDA” to violate the rule. An NDA will not be permitted to 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.” Employers will also be restricted from having an NDA that functions to prevent a worker from changing employers in the same field and would be considered non-compete agreements, violative of the law.
Yes. As with NDAs, a non-solicitation provision that functions “to prevent a worker from seeking or accepting other work or starting a business after their employment ends” will not be enforceable.
Evaluating the exceptions to the FTC’s ban on non-compete agreements reveals a rule that in many respects echoes the law that currently applies to New York employers and employees that are seeking to enforce or escape a non-compete agreement. Ongoing litigation also calls into question whether the rule will ever go into effect. Nevertheless, it is not too early for employers to review their current non-compete agreements to ensure compliance with the new FTC rule or consider language changes to their non-compete agreements that may be necessary to come into compliance if or when the rule goes into effect, as well as any operational or business issues that language changes may create.
If you have questions about this update, the FTC rule, or non-compete agreements, please contact the authors of this article or an attorney at Clifton Budd & DeMaria, LLP.