CLIENT ALERT: NEW U.S. LAW AGAINST NON-COMPETES REQUIRES ACTION NOW FOR PAST AND CURRENT WORKERS

By: Mitchell C. Shelowitz and Sean Scheinfeld

As of  September 4, 2024 (the “Effective Date”), virtually all post-termination non-compete restrictions will become illegal in the United States as an unfair method of competition.  As such, U.S. businesses that include post-termination non-compete covenants in their contracts must take immediate action in order to avoid potentially astronomical monetary penalties.

SLG is pleased to provide the following short overview and recommendations concerning the Non-Compete Clause Rule (the “Rule”) [1] adopted by the U.S. Federal Trade Commission (the “FTC”).[2] 

1. All Types of “Workers” Are Covered by the Rule. The Rule has extremely broad application and removes the distinctions between full-time employees and any other form of individual engaged by a business.  All such individuals are lumped together under the term “worker.”  The definition of “worker” is all encompassing and includes current and past, paid and unpaid individuals, including employees, contractors, externs, interns, volunteers, apprentices, or sole proprietors.[3]
2. Senior Executives Are Covered, Unless Bound by Non-Compete Before Effective Date. Importantly, any non-compete restrictions with “senior executives” that are in effect prior to the Effective Date are not subject to the Rule.  However, non-compete restrictions may not be included in new agreements with senior executives following the Effective Date.  A “senior executive” is defined as a worker who is in a “policy-making position” and receives annual compensation in excess of $151,164, subject to certain qualifiers.[4]
3. What is a “Non-Compete Clause” Under the Rule? The Rule defines the term “Non-Compete Clause” as a written or oral “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 U.S. after the conclusion of the employment; or
(ii) Operating a business in the U.S. after the conclusion of the employment.[5]

4. Immediate Notice Requirements to Past and Current Workers to Avoid Penalties. Before the Effective Date, businesses are required to notify “workers” that are subject to non-compete covenants that “the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.”[6]  The notice must be delivered by hand, mail, email, or text message to the worker.
5. Penalties. The FTC has broad jurisdiction to enforce the Non-Compete Rule, including through imposing monetary fines of $51,744 per violation of the Rule, as well as injunctive, compliance, and other broad remedies.
6. Limited Exceptions to Rule for Non-Compete in Context of Sale of Business. The Rule does not apply to non-compete clauses entered into “pursuant to a bona fide 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.”[7]

SLG has extensive experience advising clients regarding FTC rules, laws, and guidelines.  For further guidance on the Rule, please contact SLG at info@shelgroup.comto schedule a consultation or check out our website at http://www.shelgroup.comfor more information about the firm.

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[1] See 16 CFR §§ 910.1 – 910.6.
[2] Importantly, the Rule is expressly limited to non-compete provisions that begin “after the conclusion of the employment.”  See 16 CFR §§ 910.1. Thus, any non-compete provisions that bar a worker from working for a competing business during the term of employment will continue to be enforceable and will not be deemed an unfair method of competition.
[3] The Rule expressly exempts franchisees from the definition of worker “in the context of a franchisee-franchisor relationship.”  Id. at § 910.1.
[4] Id.
[5] Id. (emphasis added).
[6] Id. at § 910.2(b)(1).
[7] Id. at § 910.3(a).