On April 23rd, 2024, the Federal Trade Commission issued a ruling that, in effect, bans employers from creating/enforcing non-compete clauses on their workers. Although this ban does not apply to every non-compete clause, the overarching goal of the ban could be either good or bad for the business owners within the United States. This article will go into the specific rulings the FTC has made and how they will affect business owners and their relationships with key employees, when they become enforceable later this year.
A Non-Compete Clause is a Term of Condition that Restricts Future Employment
The Federal Trade Commission 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 of condition.”
In other words, a non-compete clause is a restriction placed upon a worker by an employer that prevents the worker from gaining employment or starting a business following their release from their prior employment.
When the definition states “… after the conclusion of the employment that includes the term or condition,” the FTC gives the example of “a contractual term between a national sandwich shop chain and its workers stating that, for two years after the worker leaves their job, they cannot work for another sandwich shop within three miles of any of the chain’s location.” The “term or condition” that the FTC is referring to is of the specific condition that could be found in a non-compete clause, such as not being able to work at a competitor sandwich shop during a specific period following your dismissal from the prior sandwich shop.
A non-compete clause can be applied to any worker, employee, contractor, intern, volunteer, or any other type of worker-employer relationship. The only type of employee a non-compete clause does not apply to is a franchise in relationship to a franchise-franchisor relationship. The FTC ruling is broad in its definition of what a worker is and therefore could have a negative impact on employers’ opportunities to protect their own interests. To figure out what type of workers apply to the FTC ban, please find “Who Qualifies as a Worker under the FTC Non-Compete Clause Ban and How that Affects Business Owners,” on our website.
The FTC Ruling’s Ruling Says Non-Competes are a Form of Unfair Competition
The FTC’s official rule states that “The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 (of the FTC ACT)—for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date.” Stated another way, the FTC has ruled that an employer’s formation or continuing use of non-compete clauses against an employee is no longer valid.
The FTC’s rule applies to almost every type of non-compete clause, with a couple of major exceptions. According to the FTC, the ban on non-compete clauses does not apply to the non-compete clauses entered into by a company’s senior executive. The FTC defines senior executives as employees earning more than $151,164 annually and who are in policy-making positions. Another exception to the ban on non-competes clauses is for clauses created when a business owner sells their entire business in a bona fide sale. The non-compete clause that would apply to the previous owner of the business is allowed to continue as the relationship between a buyer and seller of a company creates a unique situation and interests where the non-compete would be necessary to protect the individual’s own interests. Therefore, according to the FTC, preexisting non-compete clauses for senior executives and bona fide business sales can remain in effect, while the rest of the non-compete clauses used against employees by employers will become null and void 120 days after the date of the publication of this ruling in the FEDERAL REGISTER, which would be September 4th, 2024.
Also, non-competes between “non-workers” would also be considered valid and outside the scope of the FTC’s ruling on this matter. As stated within the FTC’s ruling, “The Commission explained that the proposed definition of non-compete clause would be limited to non-competes between employers and workers and would not apply to other types of non-competes, for example, non-competes between two businesses.” Therefore, if a business comes to a contractual agreement with another business, both of those businesses could enter into a non-compete clause with each other. These types of non-compete clauses will still be allowed under the new rule and therefore would not be banned, unlike the employer-worker non-competes will.
The FTC Says Other Options Exist to Protect Companies, Including Confidentiality, Non-Solicitation and Trade Secrets
Although the Federal Trade Commission is issuing the ban on non-compete clauses later this year, there are other options that small business owners have when it comes to protecting themselves and their company from losing employee and their business secrets. These options include non-disclosure and non-solicitation agreements and trade secret laws. Both non-disclosure and non-solicitation agreements allow employers to keep their employees from giving away the employer’s business practices and confidential information from being given to other businesses.
The FTC Believes a Ban on Non-Competes will Improve the Economy and Worker Rights
The Federal Trade Commission had several reasons for wanting to ban non-compete clauses. The reasons being that non-compete clauses are economically harmful to workers as they take away the workers’ chances from obtaining better employment at a different company then their previous one. The FTC stated that an estimated 30 million workers were subject to a non-compete clause by their employer, and the prevalence of these clauses were a detriment to the workers employment opportunities. In the same article, the FTC stated that the dissolution of non-compete clauses would lead to an increase in business creation as well as patent development and increase in earnings for workers. Although the FTC’s reasonings sound good for both the workers and business owners, the overall impact might tell a different story once it is enacted.
Employers with Non-Competes are Required to Issue Notice of Non-Enforcement by September 4th 2024
The Federal Trade Commission has stated that under this new rule, employers do not have to legally modify existing non-compete clauses by rescinding them. Instead, employers who have entered non-compete clauses with their workers need only to provide those employees with notice that their non-compete agreement will not be enforced following the date of execution of the rule. This notice must identify the person who entered the non-compete with the worker and must be delivered by hand to the worker, by mail to the worker’s last known personal address, through email to the worker’s last known personal email, or through a text message to the workers last known mobile cell phone number. Look for “Employer’s Tasks to do Following FTC Non-Compete Clause Rule Enactment”, to learn more specifics of what needs to be done if the ban goes into effect.
What Happens if Ban is Found to be Unconstitutional?
If you are an employer and you release all your workers from their non-compete clauses as required by the FTC in its ban, if the ban is found to be unconstitutional, you may not be able to put the genie back in the bottle, so to speak. If this occurs, employers may not be able to reclaim their original non-compete language in their original agreement with the relevant employees, because such employees may be able to defend themselves by arguing detrimental reliance, a legal doctrine that serves as a defense to breach of contract claims, or through several exceptions to the rule.
To learn more about what to do if the FTC ban is found to be unconstitutional, please look for “How to Solve Issues Relating to the Waiving of Non-Compete Clauses following Potential FTC Ban Reversal” on our blog page.
Conclusion
To be prepared for the FTC’s potential ban on the non-compete clauses, business owners need to figure out who their senior employees/executives are and whether they fall within the exceptions for the non-compete clause ban. Business owners should also start preparing for the eventuality of the prohibition by identifying all their past and current employees that they have under the non-compete clauses and getting their information readily available to give them notice of the ban’s application. Lastly, business owners and employers should monitor lawsuits related to the FTC ban to keep up to date with the current rules and how they will apply to the case.
Finally, please consult with your business attorney on the issues, to make sure you’re operating within the contours of the ban and the law.
Law 4 Small Business (L4SB). A Slingshot company. A little law now can save a lot later.
