Responding to the FTC’s Non-compete Ban

Last month, the Federal Trade Commission (FTC) issued its final rule, banning non-compete provisions (the “Rule”). The new Rule will not yet go into effect until 120 days after its publication in the Federal Register, but this publication is expected to occur at any time. The Rule will most likely go into effect in August or September of this year. The new Rule is already subject to challenges, but employers should be aware of its requirements to plan an appropriate response.

The New Rule

The Rule prohibits employers from entering into non-compete provisions, which are defined as any “term or condition of employment that either ‘prohibits’ a worker from, ‘penalizes’ a worker for, or ‘functions to prevent’ a worker from (A) 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 (B) operating a business in the United States after the conclusion of the employment that includes the term or condition. The new Rule does recognize traditional exceptions such as in the event of a “bona fide sale of a business” or “ownership interest in a business.” For example, a purchaser of a business can enter into a valid non-compete provision that prohibits the seller of the business from competing with the purchaser.

Existing Non-compete Provisions

The new Rule will also impact a majority of existing non-compete provisions. There is an exception for existing non-competes with employees that qualify as a “senior executive,” meaning a worker earning at least $151,162 annually who is also in a policy-making position. Non-competes with such senior executives may remain in effect, but employers should understand that the exception does not apply to non-competes entered into after the effective date of the new Rule.

Non-compete provisions with all other types of workers (including employees and independent contractors) are made unenforceable as of the Rule’s effective date. In addition, employers are required to provide such workers with notice that the non-compete provision will not be enforced against them. The FTC has provided a model notice that employers can utilize. Alternatively, KBA can help your company craft a notice that meets the FTC’s requirements and suits your business’s needs.

Challenges

As mentioned, the new Rule is already subject to challenge. Upon its publication, multiple parties, including the US Chamber of Commerce, initiated lawsuits against the FTC. Employers may have some time to wait and see how the courts will rule on the matter. However, it is uncertain if the courts will provide an injunction, preventing the enforcement of the Rule. Regardless, employers should review their employment agreements and policies to identify any provisions that may violate the new Rule and make any necessary modifications prior to the Rule’s effective date. Additionally, employers should be prepared to meet the notification requirements prior to such date.

If you have any questions about the Rule’s new requirements, or if you need assistance in reviewing your agreements or preparing necessary notices in response to the new Rule, please contact your Kunzler, Bean & Adamson Attorneys.