3 Key Facts About the FTC Non-Compete Rule

Prepayment-Review-Shift-Blog-07-22-2016-e1681242443952-300x187Our healthcare and business law firm guides many medical practices and physicians through employment matters.  At this point, most people are aware that the Federal Trade Commission (“FTC”) published its final non-compete rule on April 23, 2024.  As of the date of this blog post, the rule is expected to become effective on September 4, 2024.  There are legal challenges against the rule, including Ryan, LLC v. FTC in the U.S. District Court for the Northern District of Texas and ATS Tree Services, LLC v. FTC in the U.S. District Court for the Eastern District of Pennsylvania.  The judges in both cases anticipate making some decisions in each case within the next few weeks, which will provide more information about whether the rule will become effective on September 4, 2024.  It is important, however, that businesses begin gathering necessary information for counsel to review, such as all employment agreements, independent contractor agreements, and employee handbooks, now so that business are able to comply with the FTC rule if it becomes effective on September 4, 2024.  If you need assistance preparing for and complying with the FTC rule or would like to discuss this blog post, you may contact our healthcare and business law firm at (404) 685-1662 (Atlanta) or (706) 722-7886 (Augusta), or by email, info@hamillittle.com. You may also learn more about our law firm by visiting www.hamillittle.com.

In addition to the above information about key dates and current legal challenges, below are three key facts about the FTC non-compete rule as it is currently written:

  1. The rule limits non-competes both prospectively and retrospectively. Prospectively, the rule prevents employers from entering into non-competition clauses after the effective date. Retrospectively, it prevents employers after the effective date from enforcing non-competes that it previously entered into (and requires the employer to provide notice of the same).

What does the rule mean by stating that an employer may not “enforce” an existing non-compete?  This is broadly construed to mean that the employer may not do things like initiate a lawsuit, send a demand letter, or even remind the worker of his or her non-compete obligations during an exit interview.

  1. The rule applies to all workers with one limited exception. The rule will extend to employees, independent contractors, interns, externs, and other unpaid workers.  That means that no worker in any industry may have a non-compete clause govern their actions following termination of their employment.   The exception is for retrospective enforcement for senior executives.  There’s a two-part to determine if someone is a senior executive, and the FTC has made clear that this is intended to be a very narrow exception.  The two-part test is:

(i) Earnings Test. It only applies to someone who makes in excess of $151,164 annually.  This includes the worker’s total compensation.

(ii) Job Duties Test. The senior executive exception applies to someone in a policy-making position, which means they have final decision making authority over significant aspects of the business.  This is strictly construed.  The typical example of who this will apply to is C Suite executives (like the CEO).

Keep in mind, however, that the senior executive exception only applies to the retrospective restriction.  Meaning, employers with current non-competes for a senior executive may continue to enforce them like normal, but employers may not enter into any new non-competes with senior executives after the effective date of the rule.

  1. Current non-compete disputes, however, may still continue. An important point to note is that current disputes may continue after the effective date. If an employee violates a non-compete before the effective date and the employer initiates the dispute before the effective date, then that generally may continue after the effective date.

These are only some key facts about the rule.  For current employers with non-competes (which may include other restrictive covenants that are broadly drafted), employers have a notice requirement if the rule becomes effective.  That notice requirement could be onerous for employers and it includes notifying prior employers who are still under a non-compete restrictive period.  As such, we recommend preparing as if the FTC rule will go into effect on September 4, 2024 until or unless the effective date is officially postponed.  It may take time to review all necessary documents and prepare necessary notices, therefore, to remain compliant, we recommend beginning the compliance process sooner rather than later.  If you need assistance preparing for the FTC rule or would like to discuss this blog post, you may contact our healthcare and business law firm at (404) 685-1662 (Atlanta) or (706) 722-7886 (Augusta), or by email, info@hamillittle.com. You may also learn more about our law firm by visiting www.hamillittle.com.



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