On April 23, 2024, the Federal Trade Commission (“FTC”) announced its final rule prohibiting employers from entering into, enforcing, or attempting to enforce post-employment non-compete clauses (the “FTC Rule”). Subject to a limited exception, the FTC Rule will also retroactively invalidate existing non-compete clauses. The FTC Rule is scheduled to become effective on September 4, 2024.

Davenport Evans lawyer Jean Bender and Summer Associate Tyler Arend

Lawyer Jean Bender and Summer Associate Tyler Arend

A non-compete clause, as defined in the FTC Rule, means: “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.” The FTC has cautioned that non-solicitation agreements or non-disclosure agreements drafted broadly could violate this provision if they “function to prevent a worker from seeking or accepting other work.”

Application to Existing Agreements

The FTC Rule will prohibit employers from entering into all non-compete clauses as an unfair method of competition after the effective date. Additionally, it will retroactively make unenforceable all past non-compete clauses after the effective date, unless the worker meets the “senior executive” definition.

The FTC Rule has a two-part, earnings and job duties, test to determine if an individual is a “senior executive.” A “senior executive” is a worker who: (1) was in a policy-making position; and (2) received total annual compensation of at least $151,164 in the preceding year. A “policy making position” is defined as 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. In summary, for a non-compete clause to still be enforceable after the effective date, it must have been (1) entered into before the effective date; (2) cover a worker in a policy-making position; and (3) cover a worker with an annualized salary exceeding $151,146.

Exceptions to the FTC Rule

 One of the exceptions to the FTC Rule is for the bona fide sale of a business. A bona fide sale is one made in good faith as opposed to a non-competition agreement entered into in connection with a transaction whose sole purpose is to evade the FTC Rule.

The FTC Rule will not apply to employers outside FTC jurisdiction, including banks and most non-profit organizations.

 Required Notice

The FTC Rule requires the person who entered into the non-compete clause with the worker to provide clear and conspicuous notice to the worker that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The timing of the notice is left to the discretion of the employer, but it must be provided before September 4, 2024, the effective date.

The FTC provided a sample notice and its use creates a safe harbor for employers. The FTC Rule also states an employer can simply send a mass communication such as a mass email to current and former workers. An employer is exempt from this requirement if it does not have an address, email address, or phone number for a former employee. (See also FTC v. Employers: Do Banks Have a Dog in the Fight?)

Pending Legal Challenges / Next Steps

Shortly after the FTC published its Final Rule, several entities filed legal challenges in Texas and Pennsylvania. These challenges are focused on whether the FTC has authority to enact these far-reaching rules. Decisions in two of the pending cases are expected in July.

Employers should closely monitor the decisions in these legal challenges. Simultaneously, employers should determine whether it has impacted employees and whether those employees qualify as exempt senior executives and craft a plan for compliance if the FTC Rule goes into effect.

Davenport Evans stands ready to help our employment law clients with questions regarding the Final Rule and preparation for compliance. Contact a lawyer at [email protected], 605-336-2880, or find a specific lawyer here.

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Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com