Labor & Employment Blog

Last week, the Federal Trade Commission approved its issuance of a rule that outlaws nearly all non-compete clauses because, its majority believes, they are unfair methods of competition. The Non-Compete Clause Rule is a product of a 2021 Executive Order that instructed the FTC to exercise its rulemaking authority to curtail unfair use of non-compete clauses and a January 2023 proposed rule that drew more than 26,000 public comments. The FTC estimates its Rule will cause employers to increase its pay to workers by more than $400 Billion over ten years, foster the creation of more than 8,500 new businesses, and decrease spending on physician services over the next decade by up to $194 Billion. The Rule is far-reaching in its scope.

1. So, I understand there can be no more non-compete agreements. Is that right?

For most workers, yes. The Rule declares it to be an unfair method of competition for a person to do any of the following after the Rule's effective date: (1) enter into or attempt to enter into a non-compete clause, (2) enforce or attempt to enforce a non-compete clause, or (3) represent that a worker is subject to a non-compete clause. The Rule extends to current and former workers, regardless of the entity that hired or contracted with the worker and regardless of the worker's title or status, such as an independent contractor.

2. Which workers does the Rule not reach?

The Rule does not reach employers who are outside of the FTC's jurisdiction. The FTC Act exempts banks, entities that are subject to the Packers and Stockyards Act, and entities that are not organized to carry on business for its own profit or that of its members. The Rule also does not apply to non-compete clauses if they restrict only work outside of the United States or starting a business outside of the United States.

3. How does the Rule define an impermissible non-compete clause?

The Rule defines a non-compete clause as a term or condition of employment that either (1) prohibits, (2) penalizes, or (3) functions to prohibit a worker from (y) seeking or accepting work with a different person that would begin after the worker's current employment, or (z) operating a business after the worker's current employment. A term or condition of employment includes a contractual term, workplace policy, or handbook, whether written or oral.

4. Are there any carve-outs or exceptions to the Rule that allow parties to enter into non-compete clauses after the effective date?

Yes, but not for workers. The Rule does not prohibit non-compete clauses when a person enters into a bona fide sale of (1) a business entity, (2) the person's ownership interest in a business entity, or (3) all or substantially all of a business entity's operating assets. The FTC considers a sale to be bona fide if it is between two independent parties who negotiate at arm's length. Non-compete clauses within stock redemption programs or repurchase agreements are not entered into as part of a bona fide sale because, according to the FTC, the worker has no goodwill to exchange for the non-compete obligation.

5. But what about existing non-competition clauses? Does the Rule nullify them?

Except for senior executives, yes. The Rule requires the person who entered into the non-compete clause to provide clear and conspicuous notice to the worker that the existing non-compete clause will not be, and cannot legally be, enforced against the worker. The Rule does not extinguish existing non-compete clauses with senior executives, but employers cannot enter into new non-compete clauses with senior executives after the Rule's effective date.

6. How do I give notice and by when must I do so?

The Rule provides model language that can be used to satisfy the Rule's notice obligation. The notice must be in writing and can be delivered by hand, mail, email, or text message. And the person who entered into the non-compete clause with the worker must provide the notice by the Rule's effective date. The Rule's notice provision extends to providing notice to former workers too. Subject to a court order delaying or invalidating the Rule, the Rule will become effective 120 days after it is published in the Federal Register.

7. Who does the Rule consider to be a senior executive?

A senior executive is one who (1) was in a policy-making position, and (2) received total annual compensation of at least $151,164 for employment in the preceding year. The Rule defines a policy-making position as the business's president, chief executive officer or equivalent, any other officer who has policy-making authority, and any other natural person who has policy-making authority for the business that is similar to an officer with policy-making authority. An officer includes a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and other natural persons who routinely perform those corresponding functions. Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity or common enterprise. It does not include authority that is limited to advice or influence over such policy decisions, or even the final authority to make policy decisions for, a subsidiary or affiliate of a common enterprise. The FTC estimates that about 0.75% of workers will qualify as a senior executive under this definition. If the Rule stands, one can foresee litigation between parties about whether a senior employee qualifies as a senior executive so as to enforce existing non­-compete clauses.

8. What about pending claims of alleged violations of non-compete clauses?

So long as a cause of action related to a non-compete clause accrued before the Rule's effective date, the Rule's requirements will not apply.

9. So should I notify workers or expect to receive notice from my employer that our non-compete clauses will not, and cannot, be enforced?

Not so fast. The U.S. Chamber of Commerce, a non-profit association of chief executive officers, Texas's chamber of commerce association, Longview, Texas's Chamber of Commerce, a global tax services firm, and a Pennsylvania tree service company have filed three lawsuits challenging the FTC's authority to issue the Rule. The parties in the U.S. Chamber of Commerce case have filed a motion to stay and postpone the effective date of the Rule and to enjoin the FTC from implementing or enforcing it. That court, and possibly others, are expected to issue decisions about the propriety of the Rule before its effective date.

10. Do employers have other ways to protect their legitimate business interests?

The FTC encourages employers to use trade secret law, narrowly tailored nondisclosure agreements, patent law, and invention assignment agreements to protect their investments. Non-solicitation agreements are not non-compete clauses under the Rule, so long as they do not function to prevent workers from seeking or accepting other work or starting a business after their work ends. Training repayment agreements could be a functional non-compete if they force workers to remain in their current jobs and prevent them from seeking or accepting other work or starting a business. A clause that requires repayment of a bonus when a worker leaves her job is not a non-compete under the Rule if the repayment obligation is no more than the amount of the bonus and the clause does not restrict the worker's ability to work for others or start a business. The FTC acknowledges that employment terms causing workers to forfeit their accrued sick leave upon separation do not prevent workers from seeking or accepting work after the workers leave their jobs. Garden leave provisions do not run afoul of the Rule either because they are not post-employment restrictions.

11. What about state law? How does this Rule affect states' efforts to regulate non-compete clauses?

The Rule supersedes and replaces state laws that would otherwise permit or authorize a person to engage in conduct that the FTC declares is an unfair method of competition. However, if a state has chosen to regulate non-compete clauses more narrowly than the Rule, those more restrictive laws are not pre-empted.

12.  Do you have additional questions about the Rule or its impact?

Chamberlain Hrdlicka's Labor & Employment Group welcomes additional questions about the Rule and its potential impact on you or your business. If you have questions, please send an e-mail to employmentlaw@chamberlainlaw.com or call us. 

Click here to download the comprehensive FAQ.