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On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) issued its Final Rule containing regulations impacting non-compete agreements across the country for all employees. The Final Rule implements some of the most impactful changes to employment law during this century. The Final Rule will take effect 120 days from its publication in the Federal Register, which we expect to occur within the next few weeks.

What does this mean for employers?

The FTC's final rule aims to protect workers' freedom to change jobs, increase innovation, and foster new business formation by eliminating noncompete clauses that restrict job mobility. In order to achieve these goals, the FTC’s Final Rule requires the following:

1. Ban of Existing Non-competes: After the effective date (120 days from publication), all existing noncompete agreements nationwide will not be legally enforceable (with some exceptions, noted below), including agreements and provisions that have the effect of creating a restriction as to where an employee will be permitted to working following the end of employment.
2. Ban of Future Non-Competes: After the effective date (120 days from publication), employers will no longer be permitted to enter into non-competes with their employees. This also includes any agreement or provision that has the effect of creating a restriction as to where an employee will be permitted to work following the end of employment.
3. Compliance Requirements: Employers will be required to notify employees (before the effective date) who are bound by existing non-competes that their agreements will not be enforced moving forward. This notification also applies to former employees that are still within the restrictions of their non-competes. We have model language prepared for this notification that meets the requirements.
4. Application to Contractors, Interns, and Volunteers: The FTC’s Final Rule applies to all “workers,” which the FTC defined broadly to include independent contractors, interns, volunteers, and sole proprietors.
5. Exceptions for Senior Executives: Non-competes for senior executives (workers earning more than $151,164 annually in policy-making positions, particularly c-suite individuals) remain enforceable. However, new non-competes (those entered into on or after the effective date) for senior executives are prohibited and not legally enforceable.
6. Exceptions for 501(c)(3) Entities: The FTC stated in the Final Rule that valid, non-profit entities under 501(c)(3) typically do not fall within the jurisdiction of the FTC. Therefore, the Final Rule will not apply to these entities. However, the FTC implemented a strict interpretation to determine whether an entity is a valid, non-profit entity. For this reason, it is believed that for many non-profit entities, including those in healthcare, the Final Rule may not apply.
7. Exceptions for the Sale of a Business: The FTC’s Final Rule will not apply to non-competes entered into by a non-employee person pursuant to a bona fide sale of a business entity, the person’s ownership interest in a business entity, or all of or a substantial amount of a business entity’s operating assets. Therefore, the FTC’s Final Rule non-competes negotiated as part of the sale of a business will remain enforceable.

What should employers do now?

1. Employers should begin reviewing all agreements and policies relating to non-compete and other similar restrictions to ensure they comply with the FTC’s Final Rule and other, applicable state law requirements. Many states are now issuing their own rules limiting the application of non-competes and non-solicitations. Therefore, we are advising that employers perform a complete review of all similar agreements/provisions.
2. Employers should contact their legal counsel discuss enforceable alternatives to non-compete agreements to achieve some of the existing benefits of non-competes. Some of these agreements/provisions may include non-solicitation restrictions, confidentiality/trade secret governance, and additional terms of contracts to alleviate premature employee departure.
3. Employers should seek guidance from legal counsel before enforcing non-competes and similar restrictions. Although existing agreements remain enforceable until the effective date (120 days from publication), future enforcement will not be permitted without an exception applying. Employers will want to ensure compliance with the exceptions before seeking to enforce such agreements.

Update Regarding Legal Action

Following the issuance of the Final Rule, various entities filed different lawsuits seeking to delay or otherwise stop the implementation of the Final Rule for various legal reasons. Some of these cases included: (a) the US Chamber of Commerce and the Business Roundtable filed a lawsuit in the U.S. District Court for the Eastern District of Texas; (b) the business tax services firm Ryan filed similar litigation in the Northern District of Texas. We expect other cases to be filed over the next few weeks as well.

Currently, no court has issued an injunction on the implementation of the Final Rule. However, we expect that one or more courts will issue injunctions as the implementation date approaches. What remains to be seen is whether such courts will be permitted to issue “nationwide injunctions” or otherwise such stays on implementation will be only in the district issuing the decision.

We will update clients regarding the status of these cases as they continue to work through the courts.

As trusted legal advisors, BMD is here to provide personalized guidance tailored to your specific situations. Please do not hesitate to reach out if you have questions or need assistance with adapting to these regulatory changes. This update from the FTC underscores the importance of maintaining compliant employment practices while supporting a dynamic and competitive workforce. Together, we can navigate this transition effectively and ensure your business remains compliant.

To this end, BMD will also be scheduling webinars over the next few months as the implementation date approaches to address questions and concerns regarding this Final Rule. We will provide updates on these webinars as they approach.

If you have questions or require additional information or guidance on how the Final Rule may impact your business, please reach out to Brennan, Manna & Diamond, LLC’s Labor & Employment Group by contacting one of its Co-Chairs: Adam D. Fuller (adfuller@bmdllc.com) or Bryan E. Meek (bmeek@bmdllc.com)