Important things you need to know about the New FTC Non-Compete Rule and how it applies to you.

Important things you need to know about the New FTC Non-Compete Rule and how it applies to you.

?The FTC has enacted broad sweeping changes to Non-Compete Clauses in Employment Contracts.? While there are legal challenges to the new rule which may change the final outcome, below is the information you need to remain compliant. You may also want to review your Employment Handbooks, Compliance Manuals, and Written Supervisory Policies and Procedures.

Summary:

According to the FTC about one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities. A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.

Under the final Noncompete Rule, the FTC adopts a comprehensive ban on new non-competes with all workers, including senior executives.

The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 for employers to enter into non-competes with workers.

For existing non-competes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force. Existing non-competes with workers other than senior executives are not enforceable after the effective date.

Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 who are in a “policy-making position.”

The final rule’s expected effective date is September 4, 2024.

Once the rule is effective, market participants can report information on a suspected violation of the rule to the Bureau of Competition by emailing [email protected]

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Compliance Guide:

The Federal Trade Commission’s Non-Compete Clause Rule bans all new non-compete clauses—you cannot enter into new non-competes with any workers after the Rule goes into effect. Any existing non-competes with workers, except non-competes with senior executives, are unenforceable as of the Rule’s expected effective date on September 4, 2024. You cannot enforce an existing non-compete against such a worker or represent to such a worker that they are covered by an enforceable non-compete. You must notify these workers that their non-competes are unenforceable.

3 Steps to Complying with the Non-Compete Clause Rule

Step 1: Don’t include non-competes in future employment contracts, paperwork, or websites This applies to all workers, including senior executives. “Paperwork” includes employee handbooks and workplace policies.

Step 2: If you have active non-competes, give notice to those current and former workers who are not senior executives that their non-competes are unenforceable Model language for the notice can be found below. If you prefer, you can write your own notice. You can deliver notice by email or text message, or deliver a paper notice by hand or mail. If you don’t have any contact information for a former worker, you don’t have to send the notice. *Notice is not required for senior executives because their existing non-competes are not affected by the Rule. As part of this step, consider whether any of your workers with active non-competes are senior executives.

Step 3: Don’t enforce existing non-competes going forward for workers other than senior executives. For workers other than senior executives, don’t enforce a non-compete in court or threaten workers or former workers with enforcement. You can still enforce an existing non-compete with a senior executive. You can also still enforce a claim that a non-compete was breached before the Rule’s effective date.

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Frequently Asked Questions about the New Non-Compete Rule:

1.?????? When is the effective date?

The Rule is expected to take effect on September 4, 2024.

?2.?????? ?Which workers are covered by the Rule?

The Rule applies to non-competes with all workers, whether full-time or part-time, including employees, independent contractors, interns, externs, volunteers, apprentices, and others—but there are different requirements for senior executives as defined by the Rule

3.?????? Which businesses are covered by the Rule?

The Rule covers all types of businesses in nearly all industries. Some employers are outside the FTC’s jurisdiction and therefore not subject to the Rule. This includes banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.

4.?????? What is a non-compete?

A non-compete clause is a term or condition, often in an employment contract, that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment. Here’s what that covers:

? Prohibits: Terms and conditions expressly saying that a worker can’t get another job, such as with a competitor, or start a business.

? Penalizes: Terms and conditions that require a worker to pay a penalty if they get another job or start a business.

? Functionally prevents: Terms and conditions that aren’t labeled as non-competes but are so restrictive that they effectively prevent a worker from getting a new job or starting a business.

5.?????? ?Is there something different about how non-competes with senior executives are treated under the Rule?

Yes. After the Rule goes into effect, expected to be on September 4, 2024, you can’t enter into a new non-compete with any worker covered by the Rule—that includes senior executives. However, an existing non-compete with a senior executive is still valid. In contrast, for workers other than senior executives, you cannot enforce existing non-competes after the effective date, expected to be on September 4, 2024 and you must give these workers notice that their non[1]competes will not be enforced. 6. How is senior executive defined? A worker is a senior executive if they earn more than $151,164 in compensation a year and are in a “policy-making position.” Compensation can include salary, commissions, performance bonuses and any other compensation agreed to that the worker knows and can expect, but does not include items like benefits or board and lodging. If the worker worked only for part of the year, you can annualize their earned compensation to see if they meet the threshold. Policy- making position includes the president, CEO, or someone else with authority to make policy decisions for the entire company.

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Model Notice to your employees:

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

?????? You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].

?????? You may run your own business—even if it competes with [EMPLOYER NAME].

?????? You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

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The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at ftc.gov/noncompetes.

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