On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that may affect for-profit employers' use of post-employment non-competes in the employer/employee context. Whether this final rule becomes the law of the land is a different question.
Here's what you need to know:
- Existing Non-Compete Agreements: All post-employment non-compete agreements with existing employees will be rendered unenforceable, except for those with senior executives who are in "policy-making" positions and earn more than $151,164 per year.
- Future Non-Compete Agreements: All future post-employment non-compete agreements with all employees (regardless of executive status) will be unenforceable and employers can be subject to civil penalties for using them after the rule is effective.
- During Employment vs. Post Employment: The rule will not affect employers' ability to restrict employees from competing while employed.
- Employment vs. Other Situations: The rule will not affect non-compete agreements in certain relationships outside of employment such as business sales and franchise arrangements, but does appear intended to apply to independent contractors.
- Notice Required: Employers will be required to offer a form of notice to employees that existing non-competes will no longer be enforced.
- Effective Date: The rule will become effective 120 days after posted in the Federal Register.
- Definition of "Non-Compete" under the Rule: Under the rule, a non-compete is: "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." We've quoted the definition from the FTC's issuance because it will certainly be subject to interpretation and much future litigation. Right now, we do not know if it will be interpreted broadly enough to include post-employment non-solicitation rules concerning customers or employees.
- For-Profit vs. Not-For-Profit Business: The rule will not affect true not-for-profit businesses, though the FTC warns of penalties for businesses attempting to skirt the rule by characterizing a for-profit business as a non-profit business.
- Does the Rule Supersede Texas Law? The FTC's rule would supersede all state laws to the contrary, including Texas.
This situation is developing and far from over. The rule is not even yet in place and a number of lawsuits challenging the FTC's authority to take this step have already been filed. Gray Reed's Labor and Employment team knows this is an issue of serious concern for employees and employers alike and will provide additional updates as circumstances warrant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.