WHAT YOU NEED TO KNOW AS AN EMPLOYER ABOUT THE FEDERAL TRADE COMMISSION’S BAN ON NON-COMPETITION AGREEMENTS

On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to approve a comprehensive final rule that prohibits non-compete agreements nationwide, affecting an estimated 30 million workers according to the Federal Trade Commission’s own estimates. [1]

This Rule is an almost total prohibition on non-compete agreements represents a significant shift from existing laws in many regions and has quickly led to legal challenges. However, the “Final Rule” has also stated an effective date of September 4, 2024 [2], which requires all persons, businesses, and employers who entered into a non-compete clause with a worker to notify them of the impending invalidity of the non-competition clause on or before the effective date of September 4, 2024 [3]. This has left many employers with questions regarding exactly what must be done by them to be in compliance. Further, employers are concerned about how they may protect themselves against unfair competition with the very workers they have trained and protect valuable trade secrets. Therefore, in this article, I will break down what needs to be done regarding the notice, what exceptions there are to this new rule, and start a discussion on how to continue to protect yourself as an employer.

What do you as an employer need to do to be in compliance with this notice?

Notify each “worker” who has signed an agreement containing a non-competition clause or who is beholden to an employee handbook/rule book containing a non-competition clause.

Notifying your employees sounds simple enough, especially when all the articles about this rule mention that the FTC provided a sample notice [4]. However, there are some small details I will enumerate below that must be considered:

a. Employers should be aware that the rule defines “worker” broadly, and includes not only employees, but also independent contractors, interns, externs, volunteers, volunteer, apprentice and sole proprietor who provides a service to a person [5]. The good news is you only have to notify employees if they have signed an agreement containing a non-competition clause, or if your employer handbook/rules include a non-competition clause. Thus, if your employees are not beholden to a non-competition clause there is no need to send any notification.

b. For each “non-competition” clause that will be invalidated as of September 4, 2024 (if the rule stands as written), you must notify each and every “worker” individually as defined by the rule. Therefore, if a “worker” has signed multiple agreements with non-competition clause in those agreements you must send a notice for each agreement which includes a non-competition clause that is impending invalidation on or before September 4, 2024 (if the rule stands as written).

c. You must send notice to the “worker” individually, you cannot simply post a notice at your place of business.


i. The notice must identify the person who entered the non-competition clause with the worker. [6] Which means you must state your name or your business name whatever is applicable.
ii. You must send the notice to each “worker” by at least one of the following means:

  1. personally, handing them the notice;
  2. mailing to the worker’s last known address;
  3. by email to the worker’s current work email or last known personal email;
  4. by text message to a phone belonging to the worker; or [7]
  5. NOTED EXCEPTION: If you legitimately do not have a record of the worker’s email, street address or mobile phone number then such person is exempt from the notice requirements under this rule. [8]

You must provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. [9]
Meaning: You must notify every person that does not fall within an exception that:

  1. The FTC has made it unlawful to enforce a non-compete clause;
  2. That you will not enforce any non-compete clause against that person;
  3. They may seek or accept a job with any company or any person even if it competes with your company;
  4. They may run their own business – even if it competes with your business; AND
  5. They may compete with your business following their departure from your business. [10]

Even if the worker is no longer working with you or at your business, if the non-competition clause is still effective, you must notify them. At the bottom of this article, you will find a sample notice provided by the FTC. [11]

What are the exceptions to this new FTC rule on non-competition agreements?

There are 4 exceptions that the FTC enumerates:

  1. Senior Executives. Existing agreements may remain in place for senior executives, [12] defined as employees in a policy-making position and annualized compensation of at least $151,164. [13] However, new agreements will be prohibited after the September 4, 2024. [14]
  2. Bona fide sales of business. [15] Specifically, the FTC states that these requirements do not apply to non-compete clauses included in agreements related to the bona fide sale of a business. The reasoning behind this exception is justified because when a business is sold, the buyer often pays a premium for the established goodwill, customer relationships, and proprietary knowledge associated with the business. A non-compete clause helps protect this investment by preventing the seller from immediately starting a new, competing business that could undermine the value of what the buyer has purchased. Permitting non-competition under this circumstance mitigates the risk for buyers and encourages business sale transactions.
  3. Existing causes of action. [16] The exception acknowledges the principle of legal certainty and fairness. When parties enter contracts, including those containing non-compete clauses, they do so with an understanding of the legal landscape at the time. Applying new regulations retroactively could disrupt the expectations and agreements made under the old legal regime, potentially causing confusion and unfairness. Contracts are built on the principle of mutual assent and reliance on existing laws. Retroactively applying new regulations could undermine the intentions and agreements made by the parties at the time of contract formation. This exception protects the sanctity of contracts by ensuring that the terms agreed upon by the parties are upheld according to the laws in place at the time of contract execution.
  4. Good faith. [17] The crucial aspect here is the requirement of good faith. Good faith refers to honesty and sincerity of intention when dealing with others. In this context, it means that the party enforcing the non-compete clause must genuinely believe that it applies in the given situation.

If I can no longer enforce the non-competition, how can I protect my business and business interests as an employer from unfair competition?

  1. The most important thing to remember is the FTC specifically states a term called “severability”. This basically means that any provision in the original agreement the employee signed; provision contained within the employee handbook; or provision in employee rule book that REMAINS valid and enforceable and shall continue to be given the maximum effect under the law [18]. So, if there were other terms such as non-disclosure, confidentiality, non-solicitation, intellectual property registration protections, training repayment clauses (so long as the terms are reasonably related to the costs the employer incurred to train the worker) in the agreement including the non-competition clauses they will remain in full effect, and you should inform the “worker” of this in the notice sent.
  2. If you as an employer did not previously have any other terms in place with your “workers”, then you can institute the following:
    a. Non-disclosure Agreements.
    b. Confidentiality Policies.
    c. Employee Training- regarding the importance of protecting sensitive information.
    d. Access Controls- password protection, encryption, restricted physical access.
    e. Data Encryption.
    f. Monitor Employee Activity.
    g. Intellectual Property Protections- Registering patents, trademarks, and copyrights.
    h. Conduct Exit Interviews- educating departing employees on their ongoing obligations to protect confidential information.
    i. Physical Security Measures.
    j. Contractual Obligations with Third Parties- Establishing confidentiality clauses in contracts with vendors, partners, and other third parties involved in the business can help protect against unauthorized disclosure of sensitive information.
    k. Trade Secret Protections- Employers can take measures to protect trade secrets, such as limiting access to only those employees who need to know the information, marking documents as confidential, and implementing measures to prevent misappropriation.
    l. Training Repayment Agreement – a type of employment contract that asserts that an employer will cover the cost for an employee to receive work related training in exchange for the employee’s continued employment for a reasonable amount of time. If the employee leaves prior to an arranged amount of time, the employee must repay the reasonably related costs that the employer incurred to train the worker. This option must be worded extremely reasonably and must not place an undue burden on the employee. Therefore, these provisions must be written carefully, and a sliding scale is suggested.

Since there are legal challenges, will this rule be overturned?

This remains to be seen, but each employer should prepare to meet the September 4, 2024 deadline as if the rule will not be overturned. Employers have a bit of time before the rule starts. During this time, they should: (1) review their current non-compete agreements and be prepared to inform non-senior executives if needed; (2) adjust their antitrust compliance programs to follow the rule; (3) talk to outside lawyers; and (4) think about how the rule might affect future mergers and acquisitions, as the FTC wants transaction-related contracts, like non-competes, to be revealed; (5) no need to jump the gun on immediate notification. However, employers should be prepared to quickly send the notices required at least 1 week prior to the effective date as there are no guarantees of the entire rule being overturned despite the numerous legal challenges.

Sample Notice Provided by the FTC

[19]

If you need legal assistance on how to properly implement the Federal Trade Commission (FTC) notice requirements for the rule making it unlawful to enforce a non-competition clause, or protecting yourself as an employer against unfair competition, please do not hesitate to contact us at 407.536.6889, [email protected]; or www.LegalWeaver.com


[1] https://www.federalregister.gov/d/2024-09171

[2] § 910.6 https://www.federalregister.gov/d/2024-09171/p-2660

[3] §910.2(b)(1) https://www.federalregister.gov/d/2024-09171/p-2646

[4] § 910.2(b)(4) https://www.federalregister.gov/d/2024-09171/p-2651

[5] § 910.1 https://www.federalregister.gov/d/2024-09171/p-2637

[6] xx910.2(b)(2)(i) https://www.federalregister.gov/d/2024-09171/p-2648

[7] https://www.federalregister.gov/d/2024-09171/p-2649

[8] §910.2(b)(3) https://www.federalregister.gov/d/2024-09171/p-2650

[9] xx910.2(b)(2)(i) https://www.federalregister.gov/d/2024-09171/p-2646

[10] § 910.2(b) https://www.federalregister.gov/d/2024-09171/p-2646

[11]§ 910.2(b)(4)  https://www.federalregister.gov/d/2024-09171/p-2651

[12] § 910.2(a)(1) https://www.federalregister.gov/d/2024-09171/p-2638

[13] § 910.1(2)(1 and 2) https://www.federalregister.gov/d/2024-09171/p-2631

[14] §910.2(a)(2)(ii)https://www.federalregister.gov/d/2024-09171/p-2644

[15] § 910.3(a)https://www.federalregister.gov/d/2024-09171/p-2654

[16] § 910.3(b)https://www.federalregister.gov/d/2024-09171/p-2655

[17] § 910(c)https://www.federalregister.gov/d/2024-09171/p-2656

[18] §910.5 https://www.federalregister.gov/d/2024-09171/p-2659

[19] §910.2(b)(4) https://www.federalregister.gov/d/2024-09171/p-2651