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FTC Bans Non-Compete Clauses in Employment Contracts

May 29, 2024

The Federal Trade Commission (FTC) recently announced a new rule, effective as of September 4, 2024, that prohibits the use of non-compete provisions in any agreements with employees. This new rule may require your immediate attention and potentially significant adjustments to your current employment contracts and practices.

Overview of the New FTC Rule and Exceptions

The FTC’s rule categorically bans all existing and new non-compete agreements with employees, with an exception addressed below. It makes any existing non-compete unenforceable and prohibits employers from entering into new non-competes with employees, though it does not require that employers rewrite existing employment agreements to remove non-compete language. You can find more information on the rule and a link to the full text of the rule here.

The rule does not apply to non-competes entered into by a person as a result of a bona fide sale of a business. The FTC rule also provides an exception for existing non-compete agreements with senior executives, allowing those non-competes to remain in place but banning employers from entering into any future non-competes with senior executives. Under the rule, the FTC defines senior executive as workers earning more than $151,164 per year who are in a “policy-making position” and have substantial influence over their organization’s strategic direction. The FTC anticipates that fewer than 1% of workers will be considered senior executives under the rule.

The rule also does not apply to nonprofit organizations, a status that includes many large healthcare organizations such as hospital groups. But there is a significant question, based on recent FTC statements, about whether the FTC will consider hospitals exempt. The FTC recently noted that some “entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction.” Specifically, the FTC stated that “some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals in the data cited by AHA likely fall under the Commission’s jurisdiction and the final rule’s purview.” It remains to be seen whether non-competes between hospitals and their employees will remain exempt under the new rule.

Employer Obligations

Under this new rule, employers must proactively inform employees (except senior executives) that any previous non-compete agreements they may have signed are no longer enforceable and will not be enforced against them going forward. We recommended that you notify your employees of this fact in writing to ensure clear communication and to maintain a record of your compliance. The FTC provided model notification language for employers to use when notifying their employees of the change. We are also happy to work with you to tailor this communication to the needs of your business and the specific circumstances of any other agreements you have in place with your employees.

Alternatives to Non-Compete Agreements

Despite this new rule, you still have effective tools to protect your business, such as non-disclosure agreements (NDAs) and non-solicitation agreements. NDAs can effectively protect your sensitive information and trade secrets, while non-solicitation agreements can prevent former employees from poaching your clients, patients, vendors, employees and contractors. These alternatives must be tailored specifically to safeguard your legitimate business interests without overly restricting an employee’s ability to work in their field. We regularly work with clients to craft effective and properly tailored NDAs and non-solicitation agreements and we stand ready to assist you with this type of protection when the need arises.

Next Steps

The new rule is being challenged in more than one lawsuit, and such challenges could result in enforcement of the new rule being stayed, or paused, until the lawsuits are complete. A Texas court said it will rule on whether to issue a stay by July 2024. Employers should continue to monitor the status of the new FTC rule and we will continue to provide updates. If no stay is issued, employers should be prepared to comply with the new rule by September 4, 2024.

We strongly advise you to review all of your current employment and contractual agreements to ensure they comply with the new FTC rule. Our team would be pleased to assist you as you prepare to communicate these changes to your employees, make these adjustments and consider implementing effective alternative solutions that comply with the law.

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