Important Takeaways from the Final Rule Banning Non-Competes

In an anticipated yet groundbreaking turn of events, on April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to issue a Final Non-Compete Clause Rule (the “Final Rule”) which bans U.S. employers from using non-compete agreements for almost all workers.

The Final Rule is already the subject of multiple legal challenges, but if not enjoined by a court, the Rule will become effective within 120 days of publication in the Federal Register.

The Final Rule applies to agreements between employers and all “workers,” which include employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. The Rule prohibits employers  from enforcing existing non-competes with workers other than senior executives after the compliance date (i.e. 120 days after the Final Rule is published in the Federal Register).

The Rule applies both to provisions that “prohibit” an individual  from working for a competitor in subsequent employment as well as provisions that “penalize” an individual for working for a competitor, such as liquidated damages or equity forfeiture provisions.  

The Rule contains two limited exceptions: (1) existing non-competes can remain in force for “senior executives,” defined as an “officer with policymaking authority” who earns in excess of  $151,164, but this exception will not be available for new non competes entered into after the Rule’s effective data; and (2)  non-competes made in connection with the sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. The Final Rule requires employers to inform workers and former workers that any preexisting non-compete agreement is no longer enforceable. 

The Final Rule also applies to “de facto” non-compete clauses that have “the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer” (the “functional test”). The FTC noted that the Final Rule’s definition of a non-compete does not categorically prohibit other types of post-employment restrictive covenants such as non-disclosure agreements (“NDAs”), non-solicitation agreements, training repayment agreement provisions (“TRAPs”), and “garden leave” provisions. However, the FTC did note that such a provision could be deemed to be “de-facto” non-compete if drafted so broadly that the provision would hinder the ability of a worker to seek or accept employment or operate a business after the conclusion of their employment. Such provisions would, therefore, violate the Final Rule.

Notably, the FTC rejected requests to exempt industries, such as healthcare, in which not-for-profit entities are prevalent. Under the Act, only a corporation that is “organized to carry on business for its own profit or for that of its members” is subject to FTC jurisdiction. Thus, not-for-profit entities are often assumed to be exempt from the FTC’s enforcement authority. In the Final Rule, the FTC noted that organizations which have not-for- profit status under Section 501(c)(3) of the Internal Revenue Code are “not categorically beyond the Commission’s jurisdiction” because some entities that have received that designation may carry on business for their own profit or for that of their members.

The Final Rule provided examples of instances where the FTC has exercised jurisdiction over entities with tax-exempt 501(c)(3) status. For instance, certain physician-hospital organizations, independent physician associations, and tax-exempt nonprofit hospitals that partner with for-profit entities were found to be organized for the profit of their members within the meaning of the FTC Act and thus subject to the non-compete ban notwithstanding their 501(c)(3) status.

We will continue to monitor and update this issue. Please contact a Franczek attorney with any questions.