As our clients know, FOS actively monitors and advises clients on changes in the law that could positively or negatively impact them.
Of particular note over the past year has been the changing landscape of non-compete agreements in employee contracts. In particular, FOS has been closely monitoring the January 2023 proposed rule issued by the Federal Trade Commission (FTC) to ban the majority of non-compete agreements across the country. See, for example, https://foslaw.com/ftc-issues-proposed-rule-to-ban-most-non-competes/; https://foslaw.com/wp-content/uploads/2023/10/Fall-2023-Client-Newsletter.pdf.
On Tuesday, April 23, 2024, by a 3-2 vote, the FTC made the proposed rule final, with only minimal changes.
The final rule severely limits the use of non-compete agreements for for-profit employers. The rule may be found here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
The final rule prohibits post-employment non-compete agreements with “workers” on or after the rule’s effective date, 120 days after it is published in the Federal Register. As of this writing, the final rule has not yet been published, but publication is expected imminently.
The FTC determined that such agreements constitute an unfair method of competition (and a violation of Section 5 of the Federal Trade Commission Act).
The final rule defines a “non-compete clause” as a term or condition of employment (including a written or oral contractual term or workplace policy) that prohibits a “worker” from, penalizes a “worker” for, or functions to prevent a “worker” from: 1) seeking or accepting work in the United States with a different person (including a company) where such work would begin after the conclusion of employment with the current employer; or 2) operating a business in the United States after the conclusion of such employment.
The final rule defines “worker” broadly, as a natural person who provides paid or unpaid services, regardless of title or status (e.g., employee, independent contractor, extern, intern, volunteer, apprentice, etc.). This definition appears to apply to a broad spectrum of employees –from low-level to senior employees.
The definition of “worker” also applies to individuals working for a franchisee or franchisor. The “franchisee” itself, however, in the context of a franchisor-franchisee relationship, is not considered a “worker” under the final rule.
The final rule takes a different approach regarding higher-paid employees with existing non-competes, entered into before the final rule’s effective date, versus those created after its effective date.
For senior executives, existing non-competes remain enforceable. “Senior executives” are defined as workers in policy-making positions with annualized cash compensation of at least $151,164.
For workers who are not senior executives, existing non-competes, as defined in the final rule, will no longer be enforceable after the final rule’s effective date.
In a move that may be distressing to employers with existing non-competes, the final rule requires employers to provide a specified notice to employees, by the rule’s effective date, that post-employment non-compete agreements, as defined in the final rule, are no longer enforceable. While the final rule does not expressly limit the required notice to only those existing non-competes which have not expired and are still within their restricted time periods (usually one or two years), it would appear illogical and administratively burdensome to require an employer to issue a notice which will have no effect.
The final rule does not apply to non-competes entered into in connection with the sale of a business.
The FTC has indicated that non-disclosure and confidentiality provisions may come within the final rule if they would otherwise fall within its definitions.
Court challenges to the FTC’s final rule are expected. These challenges may delay or ultimately preclude the rule’s enforcement beyond the current enforcement trigger of 120 days after the rule’s effective date. To the extent that existing state laws conflict with the FTC’s final rule, the FTC’s position is that the final rule preempts state laws allowing non-competes, which would include Wis. Stat. § 103.465.
For better or worse, the final rule aligns with recent state efforts to regulate and restrict the use of non-compete agreements in employment contracts. Many states have already outlawed or significantly restricted their use, particularly as to employees with lower levels of compensation. These include California, North Dakota, Oklahoma, and Minnesota.
FOS will continue to monitor this rule and any developments. For more information on this FTC rule and its impact on your business, contact your FOS attorney.
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