This post is courtesy of Guest Blog, Lori Goldstein.

On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Rule, banning all noncompete restrictions for employees and independent contractors, including existing agreements. This landmark rule is scheduled to become effective on Sept. 4th, but the Rule could actually be delayed, tossed, or changed by litigation before then. The U.S. Chamber of Commerce filed suit on April 24th, and businesses and organizations nationwide are challenging the FTC’s authority to issue the Rule.

What is the Rule?

The Rule bans noncompete provisions/restrictions – current and future – across the U.S. and replaces the patchwork of state noncompete laws. It would prohibit contractual terms and workplace policies that “prohibit a worker from seeking or accepting work with anyone, or operating a competing business, in the U.S. after the working relationship ends. This will affect employment and severance agreements, NDA/confidentiality agreements, and even deferred comp/equity agreements that penalize employees with forfeiture of their equity for competing.

Why impose a nationwide ban?

The FTC touts many reasons: to provide workers with more freedom, enhance innovation, increase new business formation and increase worker earnings.

  • Can employers still restrict workers from soliciting away their customers, prospects and employees? Yes, the ban only covers “noncompete” restrictions. It will not impact non-solicit, NDA/confidentiality, non-disparagement or other restrictions, subject to state law, and trade secret and defamation laws.
  • Can an employee provide competitive goods/services to former customers who reach out without the employee soliciting them? Actually no. Even though the restriction might be called a “non-solicit.” preventing the individual from working for the client is considered a “de facto” noncompete. The Rule will ban broad clauses that have the “same functional effect” of preventing someone from taking a job elsewhere.
  • Can businesses prohibit employees from competing while they are still employed? Definitely, it will only affect post-employment and post-engagement. In fact, if an employer provides an employee with “garden leave” – i.e. continuation of full salary and benefits for a certain period, the employer can enforce the noncompete during that time.

Does the Rule have any exceptions?

  • Nonprofits, banks, insurance companies, airlines, transportation and communications carriers, because they are not subject to the FTC Act.
  • The “bona fide sale of a business” by an owner, member, or partner holding at least a 25% ownership in the business entity.
  • Franchisees/franchisor noncompetes (but the ban still applies to employees of franchisees.)

There is also an exception for existing noncompetes with “Senior Executives” – employees who earned more than $151,164 total annual W-2 compensation in the preceding year and who is in a “policy-making position.” That means the company’s president, chief executive officer, or any other officer or individual who has final authority to make “policy decisions that control significant aspects of a business entity or common enterprise.”  But the ban will still prohibit new noncompete restrictions with Senior Executives entered into after the Rule’s effective date.

Will the Rule impact unpaid volunteers?

Yes, it will cover anyone who works for a for-profit employer, whether paid or unpaid, including externs, interns, volunteers, apprentices, and sole proprietors.

How does the retroactivity part work?

The ban would not only affect future contracts, but it would apply retroactively to existing agreements. Businesses will be mandated to notify current and former employees and contractors before the effective date of the rule, that any existing noncompetes are no longer enforceable.

What if I have pending noncompete litigation?

Current claims and litigation involving alleged noncompete violations prior to the rule’s effective date can continue. So an employer can still pursue an employee for accepting new employment in breach of a noncompete if they did so before the effective date.

If I have employees, what should I be doing now to prepare?

  • Review your current restrictive covenant agreements to assess if they are currently enforceable based on applicable state laws. Some states already ban noncompetes and some impose minimum salary thresholds and other requirements. It’s risky for individuals or employers to simply assume that post-employment restrictions aren’t enforceable and until the Rule becomes effective, state laws will apply. Courts generally enforce the parties’ “choice of law” (as designated in the contract). However, if an employee worked in a different state, particularly one with more employee-friendly restrictive covenant laws, a court might apply that law.
  • Determine who are “Senior Executives” and examine their restrictive agreements. There is still an opportunity to enter into enforceable agreements with them before late August.
  • Make a list of existing restrictive covenant/noncompete agreements with current and former employees and contractors, create and be timely prepared to issue notices.
  • Think big picture: Why do you need a noncompete? How would you explain to a judge the need to keep someone out of the industry? Consider alternatives and strengthen covenants on confidentiality, IP, and non-solicitation.
  • Exercise due diligence. If hiring, ask for and review your candidates’ restrictive agreements, and make sure the hire won’t cause contract violations.. Obtain a legal opinion on the validity and probable enforceability under applicable law. Companies sue new employers for interference with a former/current employee’s restrictive covenant agreement.
  • Whether you’re a business or an individual, it you receive a cease-and-desist letter, take it seriously and seek legal advice.
  • If one of your former employees is violating or threatening to violate a restrictive covenant with your company, investigate and take necessary action.

Bio:Lori Goldstein, a passionate employment lawyer since 1984, has a unique business and perspective, representing both employers/business owners and employees through her solo practice, the Law Office of Lori A. Goldstein LLC. Lori is practical and passionate about helping organizations and individuals achieve peaceful solutions to workplace issues, find closure, and move forward.

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