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  • Daniel Rodriguez

Understanding the FTC's Final Noncompete Rule

The Federal Trade Commission (FTC) has issued a groundbreaking final rule that bans all new noncompete clauses and renders most existing noncompete clauses unenforceable. This final rule joins California’s outlook on creating public policy that favors open competition and employee mobility.


FTC final rule on noncompetes

Understanding the New Rule

On January 19, 2023, the FTC proposed a rule addressing non-compete clauses under sections 5 and 6(g) of the FTC Act, culminating in a final rule after extensive research and public feedback. This rule declares that it is an unfair method of competition and, thus, a violation of section 5, or employers to enter into, enforce, or attempt to enforce noncompete clauses with any workers on or after the rule's effective date, which is set for September 4, 2024.


Scope and Definition

The rule defines a noncompete clause as any term or condition of employment that prevents, penalizes, or functions to prevent a worker from seeking or accepting employment with another entity or from operating a business after their current employment. This definition covers various employment forms, irrespective of the worker's formal title or legal status, encompassing employees, independent contractors, interns, and more by defining “employment” as “working for another person.”


Implications for Different Worker Categories


New Noncompetes

All new noncompete agreements entered into after the effective date are prohibited, ensuring all workers are free from these restrictions moving forward.


Existing Noncompetes for Non-Senior Executives

The rule mandates that noncompete agreements already in place before the effective date are no longer enforceable for workers who are not senior executives. Employers must notify these workers that their non-compete agreements have ceased to be enforceable.


Existing Noncompetes for Senior Executives

In contrast, this rule will not affect existing noncompete agreements with senior executives. These can remain in force, recognizing senior executives' unique positions and potential competitive impacts.


Who is Considered A Senior Executive?

Per the FTC, senior executives are workers in policy-making positions and receive a total compensation of $151,164.


Why This Rule?

The FTC adopted this rule to address noncompete clauses' broad and profound impacts on labor mobility and market competition. Restrictive covenants in employment contracts have been shown to limit wage growth, hinder innovation, and reduce market competition. The extensive public commentary and empirical research reviewed by the FTC underscored the need for reform, leading to the development of this rule.


Does this Rule Apply to Your Business?

The final rule is broadly applicable, encompassing various businesses across all sectors. However, certain employers fall outside the jurisdiction of the FTC and, as such, are not governed by this rule. These exceptions include banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and select non-profit organizations, exempt from this rule's provisions due to specific statutory exclusions.


Does this Rule Apply to Business-to-Business Noncompetes?

The rule specifically addresses noncompete agreements between businesses and their workers. For instance, while the rule does not extend to noncompete clauses within franchisor-franchisee agreements, it does govern noncompetes between employers and their workers within franchise operations. However, it is important to note that other forms of non-competes, such as those occurring directly between businesses, remain subject to prevailing antitrust laws.


Action Steps for Employers


Calendar the Effective Date of the Final Rule

The FTC’s new rule on noncompetes will be effective September 4, 2024. If noncompetes are a key facet of your business or hiring strategy, then you must be prepared to shift away from that by September 4, 2024.


Review and Revise Contracts

Employers should immediately review employment contracts to identify non-compete clauses that might be impacted. Legal counsel can assist in this review to ensure all documents comply with the new regulations by the effective date.


Issue Compliance Notices

Employers must notify affected workers of the change to existing non-competes that will become unenforceable. The FTC has provided model language for these notices, which employers should use to ensure compliance.


Training and Policy Updates

Update training programs and policy manuals to reflect the new rules. Ensure HR teams and management understand the changes and the new legal landscape.


Conclusion

The FTC's final rule on non-compete clauses represents a significant shift in employment law, promoting greater worker mobility and competition. Employers must proactively align their practices with this new regulatory framework. By staying informed and prepared, your organization can smoothly transition into this new regulatory environment, maintaining compliance and supporting a fair, competitive market.


Contact Us

Do not hesitate to contact NewPoint Law Group, LLP, for further guidance on this rule or other employment law matters. Our team of employment defense attorneys is ready to assist with your legal needs to ensure your business complies with these new regulations and thrives in an ever-evolving legal landscape. Call us at (800) 358-0305.

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