FTC Non-Compete Ban: What Employers Need to Know
The Federal Trade Commission’s new rule banning non-compete clauses is effective September 4, 2024 and will impact those in the construction industry. The ban applies to both employees and independent contractors, and pre-existing non-compete agreements will be void.
The Federal Trade Commission (FTC) Non-Compete Ban: The ban is broad and invalidates any new non-competes entered into with workers (employees and independent contractors) after the effective date, except in limited sale of business transactions.
As of the effective date, all existing non-competes will also be invalidated. There is a narrow exception that existing non-competes for Senior Executives will remain in force. Senior Executives are defined as workers earning more than $151,164 annually who are in policy-making positions (e.g. CEO, President or equivalent). Employers cannot enter into non-competes with newly hired Senior Executives after the effective date.
The FTC broadly defines “non-compete” as meaning “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Additional Items of Note:
When the new rule goes into effect, employers will have an affirmative obligation to notify non-excepted employees that their non-compete is no longer valid.
Violations of the rule may result in fines, penalties, and other injunctive relief.
Although the FTC has broad enforcement powers, there are some exceptions to the entities or activities it has jurisdiction to regulate, including banks, insurance companies, non-profits, transportation and communications common carriers, air carriers, and some other entities.[1] Entities that are not subject to FTC regulation are arguably not going to be subject to the new ban.
What Should an Employer Who Uses Non-Competes Tell Its Employees?
- The Company is monitoring the situation, but all existing non-competes currently remain in full force and effect.
- The Company will continue entering into non-competes with new hires and will monitor legal updates and adjust its practices consistent with federal and state requirements.
What Should Employers Be Doing Now?
- Wait and see whether the rule gets enjoined by courts. There have already been several legal challenges that are working through the court system.
- Consider strengthening existing protections for confidential and trade secret information through policies and agreements.
- If an employer requires new hires to sign non-competes, it should continue to do so to avoid any risk that it might have to later provide new consideration to employees if they did not sign a non-compete at the time of hire and the FTC ban is enjoined or struck down.
About the Author – Kate Dewberry, Partner with Poyner Spruill, represents clients in federal and state court, arbitration, and proceedings before administrative agencies including the Equal Employment Opportunity Commission, the United States Department of Labor, the Office of Federal Contractor Compliance, OSHA, the North Carolina Department of Labor, and the North Carolina Division of Employment Security. She is based in Poyner Spruill’s Raleigh office.
[1] https://www.ftc.gov/news-events/media-resources/what-ftc-does
