Employment Counseling & Risk Management

On April 23, 2024, the Federal Trade Commission (“FTC”), in a 3-2 vote, issued its Final Rule effectively banning non-compete agreements nationwide with limited exceptions. See the FTC press release here. Under the Final Rule, starting on the effective date, employers may not enter into new non-compete agreements with any worker (for example, any employee, including senior executives, and even independent contractors). Further, prior to the effective date, employers must notify any current and former workers bound to an existing non-compete that it will no longer be enforceable. One narrow exception is that existing non-competes for “senior executives” – defined as those who earn more than $151,164 per year and have the authority to make policy decisions that control significant aspects of a business (e.g., a president or CEO) – remain enforceable. However, non-competes with “senior executives” will be prohibited after the Final Rule becomes effective. Notably, the Final Rule does not apply to non-competes in the context of bona fide “sale-of-business” agreements or to other forms of restrictive covenants (e.g., confidentiality agreements, NDAs, non-solicits).

Although the Final Rule becomes effective 120 days after publication in the Federal Register (which is still forthcoming), it is anticipated that immediate court challenges will be filed, likely delaying or precluding its enforcement. In an abundance of caution, however, employers should review the key takeaways below and anticipate the possibility of needing to comply in just over four months’ time. We will, of course, continue to keep you informed as updates arise.

Below are key aspects of the rule that will go into effect 120 days after it is officially published in the Federal Register:

• “Non-compete clause” is defined as a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from, seeking or accepting work after the conclusion of their employment.
• The Final Rule establishes a comprehensive ban on all new non-competes for all workers, including "senior executives." Existing non-competes will also be null and void, except for existing non-competes with “senior executives.”  “Senior executives” are specifically defined as those earning more than $151,164 per year and who are in a “policymaking position” (which is defined in full at the conclusion of this alert). The FTC indicates that this term is intended to refer to Presidents, CEOs, or their equivalents.
• The ban applies to all “workers,” not just employees. “Workers” is defined in the Final Rule as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.”
• The FTC eliminated a provision from the previous version of the rule that would have required employers to rescind existing non-competes. Instead, employers may simply provide notice to current and former workers bound to an existing non-compete that it will not be enforced. To aid employers’ compliance with this requirement, the FTC provides model language that employers can use to notify workers. That can be found here.
• Other forms of restrictive covenants – such as confidentiality agreements, NDAs, and non-solicits – are not banned by the Final Rule; provided, however, they must not act as a de facto non-compete by otherwise preventing a worker from seeking or accepting other work or starting a business after employment ends.
• While non-competes within the context of a separation or severance agreement are banned, a “garden leave” agreement – where the employee continues to receive salary and benefits and remains employed, albeit not actively working – will remain permissible.
• There is also another narrow exception to the ban as it relates to non-competes in the context of bona fide “sale-of-business” agreements, with the Final Rule providing that it does not apply to any non-compete entered into by a “person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” 
• The Final Rule will not apply to existing causes of action related to non-competes that accrued prior to the effective date.
• The Final Rule does not apply to entities outside of FTC’s jurisdiction, with the Final Rule specifically noting banks and non-profits in this regard.
• Lastly, the Final Rule will supersede any state or local law that is “inconsistent” with it (i.e., in that it affords less protections to workers than the Final Rule), but a state or local law affording greater protections to workers will be permitted.

Final Rule Definitions regarding Senior Executives

Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.

Policy-making position means a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.

Preceding year means a person’s choice among the following time periods: the most recent 52-week year, the most recent calendar year, the most recent fiscal year, or the most recent anniversary of hire year.

Senior executive means a worker who: (1) Was in a policy-making position; and (2) Received from a person for the employment: (i) Total annual compensation of at least $151,164 in the preceding year; or (ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.

Total annual compensation is based on the worker’s earnings over the preceding year. Total annual compensation may include salary, commissions, non-discretionary bonuses and other non-discretionary compensation earned during that 52-week period. Total annual compensation does not include board, lodging and other facilities as defined in 29 CFR 541.606, and does not include payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other similar fringe benefits.

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For more information on this issue or other employment matters, please contact:

Carol M. Goodman at +1 212 592 1465 or [email protected]
Michael Berengarten at +1 212 592 1475 or [email protected]
John H. Chun at +1 212 592 1546 or [email protected]
Basil C. Sitaras at +1 212 592 1572 or [email protected]
Pamela A. Frederick at +1 212 592 1591 or [email protected]
Meaghan Roe at +1 212 592 1632 or [email protected]

© 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.