Federal Trade Commission Bans Noncompetes For Nearly All Workers

Federal Trade Commission Bans Noncompetes For Nearly All Workers

On Tuesday, April 23rd, the Federal Trade Commission (FTC) issued a final rule banning workplace non-competes nationwide. The rule defines non-competes to include a term or condition of employment that prohibits workers from, penalizes workers for, or functions to prevent a worker from (1) seeking or accepting work in the U.S. with a different employer where such work would begin after the conclusion of the employment that includes the term or condition, or (2) operating a business in the U.S. after the conclusion of the employment that includes the term or condition.

The FTC’s new rule is effective 120 days after its publication in the Federal Register. After the effective date, non-competes are banned nationwide for all workers. Moreover, non-competes that existed prior to the effective date are no longer enforceable, unless the worker is a senior executive. Existing non-competes with senior executives will remain in effect. In short, the new rule is retroactive for all workers except senior executives. To this end, employers must provide workers (excluding senior executives with existing non-competes) with notice that any existing non-competes are no longer enforceable as of the effective date.

The rule defines “senior executives” as workers who earn more than $151,164 annually and are in a “policy making position.” A worker’s annualized compensation is calculated based on the worker’s salary, bonuses, commissions, and other non-discretionary compensation earned, but does not include payments for medical and life insurance, contributions to retirement plans, or the cost of other fringe benefits. The rule defines “policy making position” to mean a business entity’s president, CEO or the equivalent, any other officer of a business entity who has policy-making authority, or any other person who has policy-making authority for the business entity similar to an officer. The rule defines “policy-making authority” to mean final authority to make policy decisions that control significant aspects of a business entity or common enterprise, and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or affiliate of a common enterprise.

There are exceptions to the FTC’s new rule. First, the rule does not apply to non-competes entered into pursuant to a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Second, the rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. Third, it is not an unfair method of competition to enforce or attempt to enforce a non-compete where a person has a good faith basis to believe that the new rule is not applicable.

In addition, the FTC’s new rule does not prohibit other types of restrictive covenants, so long as those covenants do not function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. For example, employers can utilize non-disclosure agreements to protect their confidential information. Similarly, trade secret and patent law already provide significant legal protections for an employer’s proprietary information. To this end, employers can adopt invention assignment agreements as another means of protecting intellectual property. Employers also have alternative mechanisms to protect their investment in workers, including fixed duration and non-solicitation agreements.

The FTC’s new rule supersedes all state laws, regulations, orders, and interpretations of the same that are not consistent with the rule’s requirements. States may only impose non-compete requirements and restrictions if they provide greater protections than those provided by the FTC’s new rule.

If you have questions about the FTC’s new rule, Parker Daniels Kibort can help. Give us a call at 612.355.4100.