As we previously reported, here, the Federal Trade Commission (FTC) voted to issue a final rule (the “Rule”) that would prevent most employers from enforcing noncompete agreements against workers, with only limited exceptions for existing noncompetes with senior executives and noncompetes made in connection with the bona fide sale of a business. Briefly, the Rule makes it unlawful for employers to:

• enter into, or attempt to enter into, a noncompete with a worker;
• maintain a pre-existing noncompete except for existing non-competes with senior executives; or
• represent to a worker that the worker is subject to a noncompete.

The Rule also requires that employers provide notice to current and former employees that their noncompete agreements are no longer enforceable.

Earlier last week, the FTC hosted a Noncompete Rule Compliance Webinar in which the FTC gave an overview of the requirements and prohibitions of the Rule and addressed some provisions in greater detail. Most notably, the FTC highlighted that:

• The Rule does not apply to noncompetes between a buyer and seller of a business. A seller can enter into a noncompete individually, but not on behalf of any employees.

• The Rule does not void existing noncompetes with senior executives, which the Rule defines as a worker who received compensation of at least $151,164 in the preceding year (either in total or on an annualized basis) and who holds a policy-making position.  The FTC provided clarification on each prong of this test:
  • First, compensation can include salary, commissions, performance bonuses, equity compensation and any other compensation agreed to that the worker can expect. It does not include benefits, like healthcare or retirement contributions, or lodging.
  • Second, a policy making position includes a President, CEO, or other individual who has policy making authority for the company. It would not include the head of a division within a business if their policy making authority only extends to their division.
• Note that, while the Rule does not void existing noncompetes with senior executives, it does prevent employers from entering into new noncompete agreements with senior executives after the Rule’s effective date.

• The Rule does not apply to franchisor/franchisee agreements.

• The FTC explained that a noncompete is a term or condition of employment that:
  • Explicitly prohibits a worker from seeking or accepting work or starting their own business; e.g., a standard noncompete agreement;
  • Penalizes a worker from seeking or accepting work or starting their own business; e.g., a forfeiture for competition agreement or a severance agreement conditioned on an employee refraining from taking a competing job or starting a competing business; or
  • Functions to prevent a worker from seeking or accepting work or starting their own business; e.g., other restrictive covenants or conditions that prevent such a broad scope of activity that they function to prevent a worker from competing. By way of specific example, the FTC cited a non-disclosure agreement preventing an employee from disclosing in a future job any information that is usable in, or relates to, the industry in which the employee works as a provision that would function as a noncompete and violate the Rule.

• Garden leave arrangements will not run afoul of the Rule if the worker remains employed and receives the same total annual compensation and benefits on a pro rata basis during the garden leave period.

• The Rule does not apply to a provision that prohibits an employee from seeking or accepting work with a competitor or starting a competing business outside the United States. Consequently, businesses can continue to use noncompete agreements that prevent workers from accepting work or starting a competing business in another country.

• Notice to workers must be provided by the effective date of the Rule. Employers who use the model language in the Rule (available on the FTC’s website) to communicate the notice by the effective date will be in compliance with the notice requirement of the rule. Notice may be provided by hand delivery, by mail at last known personal address, by email (including through a mass email to all employees), or by text message.

• Employers can continue to protect confidential information through appropriately tailored non-disclosure agreements and trade secrets laws and prevent employees from soliciting customers or employees through appropriately tailored non-solicitation agreements.

• Employers can protect their investments in employee training by entering into agreements with employees for a fixed period of employment as appropriate to the training.

The effective date of the Rule is September 4, 2024. On that date, subject to limited exceptions, noncompetes with workers other than senior executives will no longer be enforceable and employers may not then enter, or attempt to enter, into noncompete agreements with any worker. There are lawsuits currently pending in federal courts in Texas and Pennsylvania challenging the FTC’s authority to issue the Rule and seeking to enjoin the Rule from becoming effective while the legal challenges play out.

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