New England Biz Law Update
The Federal Trade Commission has issued a final rule banning non-compete agreements for nearly all U.S. workers, a move that is expected to affect approximately 30 million employees.
The rule, which passed with a 3-2 vote, aims to promote competition, increase innovation, and foster new business formation.
The rule renders most existing non-competes unenforceable, with an exception for senior executives. No new non-competes can be created however, even for C-suite employees. The rule also covers independent contractors and limits the use of “training repayment agreements.”
The rule change follows a public comment period in which more than 26,000 comments were received, with over 25,000 of them supporting the ban. As part of that feedback, the FTC will not require employers to formally rescind existing non-competes. Instead, they are required to notify workers that such agreements will no longer be enforced.
Here are the key details:
Senior executives: Non-competes are still enforceable for senior executives with existing agreements. Moving forward, however, companies cannot enter into new non-competes with any worker. The rule defines “senior executive” as a worker earning more than $151,164 who are in a “policy-making position.”
Non-disclosure agreements (NDAs) and non-solicitation: Under the new rule, NDAs and non-solicitation agreements are still allowed, within limits. Per the rule, these agreements cannot be overly broad or onerous such that they prevent a worker from taking another job or starting a business when their employment ends. Whether an NDA or non-solicitation agreement serves as a de facto non-compete will be “a fact-specific inquiry.”
Training repayment agreements: Similarly, the FTC stopped short of banning all “training repayment agreement provisions,” or TRAPs, but said that these must be limited in nature. According to the final rule, “When TRAPs function to prevent a worker from seeking or accepting other work or starting a business after the employment associated with the TRAP, they are non-competes.” The rule does qualify, however, that requiring a worker to repay a bonus when they leave their job within a specified timeframe would generally not constitute a non-compete.
Non-competes in M&A: The FTC rule still allows non-competes in the sale of a business, preventing the seller from opening a newly competitive business. The rule covers all sellers involved in the transaction, even those with minority shares.
The National Employment Law Project (NELP) applauded the FTC’s decision.
“The FTC’s ban on non-competes will empower workers throughout the country,” Rebecca Dixon, president and CEO of NELP, said in a statement. “These provisions, which are forced on workers, have depressed wages and working conditions by eliminating the most effective means workers have to improve their jobs — quitting to take a better job.”
However, the U.S. Chamber of Commerce has vowed to sue the FTC to block the rule, calling it “a blatant power grab that will undermine American businesses’ ability to remain competitive.” The Chamber argues that the FTC lacks the authority to issue such a rule and that non-compete agreements should be governed by state laws. Meanwhile, Ryan LLC v. Federal Trade Commission has already been filed in Texas to stop the new rule.
Next steps
Without a legal stay to block the rule, existing non-compete agreements for most workers will no longer be enforceable after the rule’s effective date, which is 120 days after publication in the Federal Register.
Employers must provide notice to workers bound by existing non-compete agreements, informing them that the agreements will not be enforced in the future. The FTC has provided model language for this communication.
Employers are further advised to review NDA, non-solicitation, and training repayment agreements for compliance under the new rule. Accordingly, businesses may need to reevaluate their strategies for retaining valued talent and protecting trade secrets and other confidential information.
