On April 23, 2024, the Federal Trade Commission (FTC) finalized a rule prohibiting non-compete agreements and policies that restrict or penalize employees from seeking or accepting work, or from operating a business, after their employment ends. There are some limited exceptions to the rule.
The exceptions to the ban include:
• Any existing non-competes with “senior executives”. Such agreements are still enforceable. A “senior executive” is considered someone in a “policy-making position”, and earning more than $151,164 annually. A “policy-making position” means a business entity’s president, CEO or the equivalent, or any other officer or person who has “policy-making authority” for the business entity. “Policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise,” but it does not mean that the person’s role is limited to advising or exerting influence over such decisions.
• Non-competes connected with the sale of a business, a person’s ownership in a business entity, or a business’s operating assets.
• Non-competes at non-profit organizations.
Effect on Non-Disclosure and Non-Solicitation Agreements
Agreements that prevent employees from the disclosure or use of the employer’s confidential information and trade secrets or from soliciting the employer’s clients/customers, as well as vendors and employees, can still be enforceable. However, any non-disclosure or non-solicitation agreement that can be considered the functional equivalent of a non-compete cannot be enforced.
Notifying Employees
Employers are obligated to individually notify any current and former employees who entered into a non-compete that the non-compete provisions are unenforceable. The final rule specifies the form and content of the notice, which must be provided to employees before the effective date of the final rule.
Effective Date
The effective date of the final rule is expected to be 120 days after publication of the rule in the Federal Register. On that date (expected to be in late August 2024), any existing non-competes will not be enforceable and any new non-competes will not be allowed. Keep in mind that the final rule is already subject to legal challenge from various business groups, meaning that the effective date of the final rule may be delayed or the final rule may never become effective.