FTC’s Non-Compete Rule Update
August 12, 2024
As you have likely heard by now, the FTC issued its Final Rule on May 7, 2024, invalidating most non-compete agreements nationwide and requiring employers to notify any affected workers. While the new rule was quickly challenged in multiple courts, to date there has been no nationwide injunction of the rule entered. As a result, the FTC’s September 4th effective date is rapidly approaching, with no clear indication of whether the rule will be stayed. Given this situation, we recommend that employers prepare now to be in compliance on September 4th if the rule does not get stayed and in fact goes into effect. Employers should take the following steps now in preparation of the rule enforcement date:
1. Review your workforce to identify employees and former employees who have signed non-compete agreements.
In determining who might be affected, keep in mind that this rule applies to both current and former employees (as long as their agreement is still in effect) as well as other “workers”, such as independent contractors.
2. Analyze whether any employees fall under any of the rule’s exceptions. Exceptions exist for senior executives, as long as they meet the definition provided by the FTC, which includes both a salary level and an analysis of their duties. There is also an exception for the bona fide sale of a business. Finally, there is a “good faith” exception, but this should not be relied on as it will be applied narrowly. (For example if you have non-solicitation agreements that you do not think are covered, but they are later found to be functioning as a non-compete agreement.)
3. Document your analysis for any individuals or agreements that you determine do not fall under the rule, as this would be needed to establish the exception that applies, or your good faith defense.
4. Prepare the notice to be sent out on September 4th. There is a model notice provided by the FTC, but there are some modifications that may be appropriate for your organization. Consult with your attorney to determine the best language to use for your notice. Wait until September 4th before sending out the notices as the courts may stay the enforcement of this Rule. However, employers should be ready to act on the enforcement date.
5. Work now to gather addresses, email addresses and/or mobile phone numbers for employees/workers and former employees/workers, so that you will be ready to send the required notice via mail, email, or text message on September 4th if the rule is not enjoined prior to that date.
As your Employment Law Team, we will continue to monitor developments on this front. We stand ready to assist you with preparation to be in compliance on September 4th. Please reach out to your attorney contact here with any questions and we will work with you to get ready for this important deadline.
UPDATE 8.20.24
On August 20, 2024, U.S. District Judge Ada Brown of the Northern District of Texas issued a nationwide permanent injunction blocking the Federal Trade Commission’s (FTC) ban on non-compete agreements in employment. This ruling effectively prevents the FTC’s new rule from taking effect.
Earlier this summer, a Pennsylvania court upheld the rule, affirming it as a valid exercise of the FTC’s authority. More recently, a Florida court issued a similar ruling to the Texas court’s, blocking the non-compete rule but limiting its application to the plaintiffs involved. This split in decisions from courts in different circuits means that the case is likely to be appealed and will probably ultimately end up before the U.S. Supreme Court.
With the Texas court’s nationwide injunction now in place, employers can continue to enforce their non-compete agreements according to state laws, and the previously anticipated September 4 deadline is no longer applicable. However, given the ongoing legal debates and the potential for appeals, including to the U.S. Supreme Court, employers should remain vigilant.
To prepare, we recommend that employers compile a comprehensive inventory of all current restrictive covenant agreements, including those with former employees and independent contractors. This precaution will be useful should the ban be reinstated or if further developments arise. Having a complete record will also aid in compliance and tracking.
We will keep you updated on any significant legal changes. Should you have any questions or wish to discuss how to prepare your inventory, please feel free to contact any member of our team.