A final rule issued by the Federal Trade Commission (FTC) bans employers from entering into new non-compete agreements with all workers. If the FTC can overcome the legal hurdles it faces, the rule could have damaging consequences for small and medium-sized businesses.
On April 23, the FTC issued its final Non-Compete Clause Rule, which provides that it is an “unfair method of competition,” and thus a violation of Section 5 of the FTC Act, for employers to enter into non-compete clauses with workers, starting with the final rule’s effective date.
The FTC defines a noncompete clause as “a term or condition, often in an employment contract, that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment.”
Among the key provisions of the FTC Non-Compete Rule, it would:
- Prohibit terms and conditions that expressly prohibit a worker from getting another job, such as with a competitor, or starting a business;
- Penalize terms and conditions that require a worker to pay a penalty if they get another job or start a business; and
- Prohibit uses terms and conditions that “are not labeled as non-competes but are so restrictive that they effectively prevent a worker from getting a new job or starting a business.”
If the rule takes effect as planned on September 4, 2024, employers would be prohibited from entering into new non-competes with any part- or full-time workers, “including employees, independent contractors, interns, externs, volunteers, apprentices, and others,” states an FTC Compliance Guide.
According to the FTC guide, employers would not be allowed to include non-competes in future employment contracts, websites, employee handbooks or workplace policies.
Existing non-competes with senior executives will still be valid, whereas existing non-competes with workers other than senior executives will not be valid and will no longer be enforceable after the effective date. The final rule defines “senior executive” as workers who earn more than $151,164 and are in a “policy-making position.”
Businesses must also notify workers that their non-competes are unenforceable. The FTC has provided model language for those notices.
Uncertain future
The future of the FTC’s Non-Compete Clause Rule remains uncertain, however, as it’s already being challenged in a few courts and by business associations. On July 3, the U.S. District Court in the Northern District of Texas granted a preliminary injunction in Ryan LLC v. FTC, staying the implementation of the non-compete rule as to the plaintiffs in that case.
Among the district court’s most damning findings against the FTC:
- Plaintiffs are “likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule.”
- The FTC’s lack of evidence as to why it chose to impose “such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the rule arbitrary and capricious.”
- Denying the granting of a preliminary injunction will result in “irreparable harm” concerning nonrecoverable compliance costs.
- Not granting injunctive relief would cause significant injury to plaintiffs and the public interest, while granting the preliminary injunction “serves the public interest by maintaining the status quo and preventing the substantial economic impact of the rule, while simultaneously inflicting no harm on the FTC.”
- The FTC “insufficiently addressed alternatives” to issuing the Non-Compete Rule.
The preliminary injunction will remain in effect until the court rules on the merits, which it indicated it intends to do by August 30.
U.S. Chamber of Commerce’s response
The U.S. Chamber of Commerce applauded the decision. “This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” stated U.S. Chamber of Commerce Litigation Center Executive Vice President and Chief Counsel Daryl Joseffer.
Joseffer added, “The FTC’s blanket ban on non-competes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets. The U.S. Chamber will continue to hold the FTC accountable in court.”
Another lawsuit, ATS Tree Services v. FTC, pending in the Eastern District of Pennsylvania also seeks to enjoin the FTC’s rule. A ruling on the merits of that case is expected any day. The outcome of these decisions, and similar legal challenges, are likely to have a ripple effect on other cases that challenge the FTC Non-Compete Rule.
What now?
Given the uncertain future of the rule, compliance officers should pay close attention to see how this issue plays out in the courts by monitoring current and future legal challenges that the FTC faces.
In the meantime, compliance officers may want to help their employers proactively prepare by reevaluating their company’s current non-compete policies and procedures; identifying who could potentially be subject to invalid non-competes if the rule takes effect September 4; and preparing to notify employees, using the model language notice provided by the FTC as a guide.
For SMBs, where wearing multiple hats is the norm and meeting compliance requirements is an ongoing endeavor, staying on top of this FTC decision is a must. If you’re looking for solutions to simplify your compliance efforts with purpose-built tools that scale with your needs, NAVEX has you covered. To learn more about how NAVEX compliance solutions can help your business, click the link below.
