On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that would ban most non-compete agreements with workers across the country. Pending potential action by a court, the final rule is set to take effect on September 4, 2024. In light of the FTC’s final rule, for-profit employers should re-assess their unique risk profiles, develop strategies for notice requirements, and continue to monitor the status of the final rule leading up to its effective date.
Assess Risk
Leading up to the effective date of the final rule, employers should develop alternative plans to protect valuable assets. Employers should consider alternatives to non-compete agreements, including customer non-solicitation agreements, employee non-solicitation agreements, non-disclosure agreements, trade secret protections, and non-compete agreements made pursuant to a bona fide business sale. While technically exempt from the rule, these alternatives nonetheless cannot be the “functional equivalent” of a non-compete agreement—meaning that the alternative approaches cannot include provisions that are so broad and overly burdensome such that they function as a non-compete agreement. In considering alternative approaches, employers should assess the risk of a finding of functional equivalence and consider tailoring the provisions to their specific legitimate business interests and protectable interests.
Employers may also consider revising their agreements with senior executives prior to the effective date of the final rule. While the final rule prohibits an employer from entering into or enforcing non-compete agreements with workers, the final rule differs in its approach for “senior executives.” Existing non-compete agreements remain enforceable for senior executives, defined as workers earning more than $151,164 who are in a “policy-making position.”
Develop Strategies for Notice Requirements
Employers should develop a strategy to determine the scope of required notices and to identify recipients of notices should the final rule take effect. The final rule requires employers to provide “clear and conspicuous” notice by the effective date to workers with existing non-compete agreements that they are no longer enforceable. The final rule contains model notice language, and notices may be delivered by email, text message, mail, or hand delivery.
Employers need not provide notice to exempt senior executives or those not covered by prohibited non-competes. The final rule also contains exemptions from the notice requirement, including employees for whom the employer lacks contact information.
Continue Monitoring Rule's Status
Leading up to the effective date, employers should continue to monitor the status of the final rule. Key stakeholders should understand that the rule is “final” but will not take effect until September 4, 2024. The final rule has faced legal challenges regarding the FTC’s authority to issue the rule. Most imminently, Ryan, LLC, a tax consulting firm, brought a case before Judge Ada Brown in the Northern District of Texas seeking to stay and enjoin the final rule. The court indicated it will issue a decision on the merits of Ryan, LLC’s motion by July 3, 2024. Any decision is likely to be appealed or face other challenges, which means we are some distance from certainty on any of these issues. In light of the shifting landscape, employers should ensure no communications are made to employees prior to an intentional decision to proceed.
