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Additional Nelson Mullins Alerts

May 10, 2024

FTC’s New Non-Compete Rule: FAQs for Employers

By Mitch Boyarsky, Robert O. Sheridan, Christopher J. Eby, Matthew T. Brown

The below summary of frequently asked questions for employers concerning the Federal Trade Commission’s new rule governing non-competes (the “Rule”) is for general information purposes only. The below is not intended to and does not apply in all circumstances, or to all workers or agreements. Employers should consult with counsel before taking any action in relation to the FTC’s Rule.

When does the Rule become effective?

Pending further action by the FTC and subject to numerous pending legal challenges seeking to enjoin the Rule, the Rule will become effective 120 days from the date of publication in the Federal Register. According to the FTC’s website, the Rule’s expected effective date is September 4, 2024.

What types of non-compete clauses are barred by the Rule?

The Rule bars clauses or provisions that are a term or condition of employment and that prohibit or prevent a worker from, or penalize a worker for: (i) seeking or accepting work in the U.S. with a different person where such work would begin after the conclusion of the employment; or (ii) operating a business in the U.S. after the conclusion of employment.

What does the Rule restrict employers from doing?

Beginning on the Effective Date, employers are prohibited from entering into new non-competes that are barred by the Rule with any workers. The Rule further prohibits employers from enforcing or attempting to enforce existing non-competes with workers other than senior executives.

Who is considered a “senior executive” under the Rule?

In order to qualify as a senior executive, a worker must meet (i) an earnings test and (ii) a job duties test. Under the earnings test, the worker must earn more than $151,164 annually, as defined under the Rule. Under the job duties test, the worker must be in a policy making position, meaning the worker has final authority to make policy decisions that control significant aspects of the business entity. Mere authority to advise or exert influence over policy making decisions may be insufficient to meet the job duties test. Most traditional “C suite” employees, such as officers, presidents, and treasurers, will likely qualify as a senior executive under the Rule. 

Can an employer enforce an existing non-compete against a worker that qualifies as a senior executive?

If a worker qualifies as a senior executive under the Rule and entered into a non-compete before the Rule’s Effective Date, an employer may still enforce the senior executive’s existing non-compete until the expiration of such clause or provision.

Does the Rule apply to independent contractors and other workers?

Yes. The Rule covers any natural person who works or who previously worked for an employer, whether paid or unpaid, including, without limitation, any employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor.

Does the Rule apply to non-profit entities?

No, non-profit entities are excluded from the Rule. 

Are non-disclosure or non-solicitation provisions barred by the Rule?

Non-disclosure and non-solicitation provisions are not expressly barred by the Rule, but may fall within the ambit of banned non-competes if such provisions are impermissibly overbroad. Whether such provisions are so overbroad as to violate the Rule is a fact-specific determination. For example, if a non-disclosure provision restricts disclosure and use of general knowledge or information that is publicly known, it may violate the Rule. Employers should narrowly tailor such provisions to mitigate the risk of invalidation under the Rule and/or applicable state law.

Does the Rule apply to employee handbooks or policies?

Potentially. The Rule is not limited to non-compete clauses in contractual agreements, and may extend to non-compete restrictions in handbooks or policies if such clauses are a term or condition of employment, as defined under the Rule. If employers are unsure whether their policies are covered under the Rule, they should review with counsel.

What are the notice requirements under the Rule?

By or before the Effective Date, employers must provide clear and conspicuous notice to workers subject to non-competes barred by the Rule, that such non-competes cannot and will not be enforced by the employer beginning on the Effective Date. The notice must identify the employer and the worker and be sent to the worker’s last address on file. Employers may deliver the required notice by hand delivery, mail, email, or text message. Given that the Rule will not become effective for several months and is subject to pending legal challenges, employers should consult with counsel regarding the timing and content of notices before taking any further action.

Do employers need to provide notice to former workers?

Yes, employers must provide notice to former workers using the last known address on file. However, employers are exempted from the notice requirement if they do not have any record of a mailing address, email, or phone number on file.

Do employers need to provide the notice in languages other than English?

Providing the notice in languages other than English is optional.

Does the Rule require employers to rescind agreements with their workers?

No. While the FTC considered a recission requirement, the final Rule only requires employers to provide notice to workers that their non-compete will not be enforced.

Does the Rule have a safe harbor provision for employers?

The Rule provides that an employer is not engaging in an unfair method of competition by enforcing, attempting to enforce, or making representations about, a non-compete that the employer has a good faith basis to believe the Rule is inapplicable to. Employers should consult with counsel before enforcing, attempting to enforce, or making representations to workers about, any non-compete to ensure compliance with the Rule.

How does the Rule interact with state laws governing non-competes?

The Rule is intended to preempt and supersede conflicting state laws governing non-competes. State laws governing non-competes that do not conflict with the Rule may still be enforced.

Does the Rule impact current litigation involving non-competes?

No, the Rule makes clear that it does not apply where a cause of action related to a non-compete arose prior to the Effective Date.

Does the Rule contain a sale of business exception?

Yes, subject to the terms and definitions set forth in the Rule. According to the Rule, a non-compete entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, of all or substantially all of a business’s entity’s operating assets, remains enforceable. Given the complexity of this exception, employers should consult with counsel.

Are bonus repayment provisions permitted under the Rule?

The Rule provides that a provision requiring the repayment of a bonus if the worker leaves before a certain period of time is not a non-compete. Specifically, such a provision does not run afoul of the Rule where: (1) the repayment amount is not more than the bonus that was received; and (2) the agreement is not tied to the worker’s post-employment ability to start a business or choose their subsequent employer.

Are “garden leave” agreements or non-competes tied to severance agreements permissible under the Rule?

Depending on how such an agreement is drafted, a garden leave provision where a worker remains technically employed for a period of time and receives the same total annual compensation and benefits on a pro rata basis may be permissible. In contrast, the Rule bars severance agreements where a worker is only paid if they refrain from competing.

Does the Rule apply to restrictions on competition outside of the United States?

No.

For more information and guidance, please contact Nelson Mullins.

Disclaimer: Nelson Mullins is reviewing the FTC’s Rule effectively banning non-compete agreements. Our review and interpretation is ongoing, and is subject to change as additional guidance is released and/or the Rule is subject to judicial scrutiny and review. Several legal challenges to the Rule have already been filed, including efforts to enjoin or invalidate the Rule. Based on this quickly shifting legal landscape, clients should consult with Nelson Mullins before taking any action in relation to the Rule. The above points are general matters for client consideration, but do not apply to all circumstances, agreements, and/or workers.