The Federal Trade Commission (FTC) issued the long-awaited Non-Compete Final Rule that prohibits all new non-compete agreements and renders all existing non-competes unenforceable, except in limited circumstances. These restrictions go into effect 120 days after the Rule's publication in the Federal Registrar. "Non-compete" is broadly defined as contract or policy that "prohibits" a worker from, "penalizes" a worker for, or "functions to prevent" a worker from, seeking or accepting work, after the conclusion of their employment or from operating a business after the conclusion of their employment. Workers include traditional W-2 employees, leased employees, and independent contractors.
Non-solicitation and non-disclosure agreements are still enforceable and are not impacted by this Rule, unless they are so broad that they would otherwise prohibit, penalize, or prevent an employee from seeking or accepting other work. Further, the Rule does not apply to agreements entered into by owners of a business in conjunction with the sale of a business entity, agreements between business entities, or franchisor-franchisee agreements.
Non-compete agreements entered into by "senior executives" before the effective date of the new Rule will remain in effect. Senior executives are defined as those who earn more than $151,164 per year (inclusive of bonuses, commission, and other types of compensation) and hold a "policy-making position." The Rule defines a policy maker as a president, CEO or equivalent, or a person holding a role similar to a corporate officer who has "final authority" over matters of significance.
Employers are required to notify impacted employees and former employees that their existing non-compete agreements are no longer enforceable before the final Rule takes effect. We expect legal challenges that may result in injunctions that prohibit the new Rule from taking effect while the challenges work their way through the court systems. The Buckingham employment team will continue to provide updates as they become available. We do not recommend that you make changes to your current practices without consulting with legal counsel regarding your business' specific circumstances.
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