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The FTC Bans Non-Compete Agreements 

The Federal Trade Commission (FTC) recently enacted a Final Rule banning non-compete agreements for most workers in the U.S. This decision follows months of debate and aims to promote fair competition in the job market.  

Under the Final Rule, not only can businesses no longer make employees or contractors sign non-competes, but they also have to actively notify workers that they are no longer enforceable. To facilitate compliance, the FTC has provided model language that satisfies this requirement and gives employers several options for providing the notice including on paper, by mail, by email, or by text. To reduce any administrative burden, the Final Rules states, “Because this language does not identify the recipient as having a non-compete, you do not need to determine which of your workers have non-competes; instead, you can simply send a mass communication such as a mass email to all current and former workers.” 

The ruling does preserve existing non-competes of senior executives who earned at least $151,164 in total compensation in the preceding year. However, future executive non-competes are prohibited. 

The Final Rule does not apply to trade secret protections to safeguard confidential information. Employers can still protect confidential information through trade secret laws and well-crafted agreements. However, employers who would like to continue to rely on these types of agreements may need to consider stricter data security protocols, more narrowly tailored non-disclosure agreements (NDAs), and/or non-solicitation agreements and clear communication about what constitutes confidential information. 

The expected effective date is September 4, 2024, as long as no court or government agency stops, postpones, or invalidates it beforehand. By the effective date: 

  • Determine if you will provide individual notice only to those workers (current and former) who were subject to a non-compete agreement or if you will send a mass communication to all current and former workers. 
  • Download the applicable notices from the FTC website. The notice is also available in other languages, however, it is not a requirement that it be provided in any language other than English.
  • Assess any existing non-disclosure and non-solicitation agreements to ensure they comply with the new rule and effectively protect confidential information. 

Who is Not Covered? 

“The Act excludes from its definition of “corporation” any entity that is not “organized to carry on business for its own profit or that of its members.” While the FTC Act applies to a wide range of businesses there are some exemptions. Certain employers including certain banks, insurance companies, transportation and communication carriers, air carriers, public employers, and non-profits are exempt.  

Regarding non-profits, the Commission applies a two-part test to determine coverage which “looks to both the source of the income, (i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income, (i.e., whether either the corporation or its members derive a profit).” 

Next Steps for Employers 

The legality of the FTC’s Final Rule is already facing multiple legal challenges in court, and it is unclear how these legal challenges will impact its enforceability. However, employers should still take steps to prepare for compliance in the event the rule is permitted to stand.  

Employers who wish to maintain other types of trade secrets or confidentiality agreements should ensure that these agreements are reviewed and updated by their legal counsel. 

It is recommended that employers who need additional assistance in determining whether this Final Rule will apply to them consult with legal counsel for definitive guidance.  

Employers should stay informed about any developments that may impact the enforceability of the ban. HR Works will continue to monitor this topic and provide updates as they are available. 

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.