The FTC Adopts Rule Banning Most Non-Compete Clauses for Workers

In the recent blitz of new Department of Transportation regulations covering refunds of non-performed airline services and disclosure of ancillary fees, little attention was given to the Federal Trade Commission’s final rule on non-compete clauses in employment relationships. Despite the astonishing 570 pages devoted to the explanation of the new rules, the result is fairly straightforward, with a few exceptions I will mention. 

The final rule was published in the Federal Register on May 7, 2024, and absent intervention by the courts will become effective on September 4, 2024. Multiple challenges have been filed in the courts of Texas and Pennsylvania. Others may follow. If you have the patience for it, there is considerable material already available on these challenges. 

I am not aware of any reliable data showing the extent to which non-compete clauses that would be prohibited by the new rules are in use in the travel advisor space so I will avoid speculation about that issue. 

What does the FTC rule forbid?
In common sense terms, the rules ban terms of employment, written and oral, that impose penalties or otherwise effectively prevent a “worker” from: 

• “Seeking or accepting” work with a new employer, or
• Operating a competing business.

The term “worker” is defined in the broadest sense to include employees, independent contractors, interns, volunteers, apprentices, and sole proprietors. In franchise relationships, “worker” includes a “natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.”

The prohibition applies to all “workers” with one exception: existing non-compete clauses for senior executives are grandfathered. However, no new non-compete terms may be applied to senior executives after September 4, 2024. A “senior executive” is a person in a “policy-making position” and compensated at an annual rate of $151,164. 

“Policy-making position” is a business entity’s president, chief executive officer, or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” The term does not include a worker who only has 
policy-making authority over a subsidiary or affiliate of a business entity that is part of a larger common enterprise.

“Policy-making authority” is “final authority to make policy decisions that control
significant aspects of a business entity or common enterprise but does not include authority “limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”

The banned employment terms may be incorporated into a formal contract or be just a workplace policy.

What steps are required of employers before September 4, 2024?
To assure that workers subject to prohibited non-compete policies are aware of the changes, employers are required to provide every affected worker before September 4 with “clear and conspicuous notice that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.”

The rule provides “model language” that is deemed to comply with the notice requirement. 

You may be wondering how the rule can require action by an employer before the effective date of the rule. That is a fair question, one of the many that will likely be litigated in the many pending and forthcoming cases. Stay tuned for updates. Some preliminary rulings will almost certainly be forthcoming before September 4.

What does the FTC rule allow going forward?
The lengthy explanation of the rule’s scope makes clear that many terms of employment that are related to limiting what formerly employed workers may do are still permitted. Many of these are subject to a variety of state and federal laws that bear on their enforceability. But as regards the FTC’s non-compete rule, terms of employment addressing the protection of trade secrets, customer lists, and other sensitive commercial information may still be enforced, along with non-disclosure agreements (NDAs), subject to the qualification that those employment terms/policies do not have the equivalent effect of preventing the conduct that the FTC rule is intended to prevent. 

When the time comes to insert one or more of these provisions into the relationship with workers, you should consult with counsel. There will be special issues arising from adding such terms to existing worker relationships. And, of course, the language used will be particularly important to avoid running afoul of the FTC’s non-compete rule.

The new regulations also do not apply to a noncompete clause “that is entered into by a person 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.” This provision protects the value of the bargain agreed to by the buyer of the business who will not expect to find his newly acquired business competing against the party from whom it was purchased. 

The new rule also contains a “good faith” exception: the rule does not forbid the enforcement of a non-compete clause, or the making of statements about the validity of such a term, where the enforcing party has a “good-faith basis to believe” that the new regulation is inapplicable. How this will apply in practice is an open question. It seems clear, however, that the mere pendency of litigation challenging the rules does not form a “good faith” basis for misrepresenting to workers the status of the new rules in their relationship.

What should owners of travel advisor businesses do?
The FTC rule, and the litigation challenges it has provoked, are going to create a period of uncertainty for several months. Since the Model Language provided by the new rule for notifying current workers of their rights is straightforward, there is little reason to take major action immediately. 

Advisor businesses should stay alert to legal developments that will affect whether and when the new rules are effective. As the summer progresses, if it appears that no changes in the timing of the rules are likely, every advisor business that uses non-compete employment terms with “workers” should consult with counsel for advice as to how to proceed. If non-compete terms are in use for other than “senior executives,” they will have to be replaced by carefully crafted terms addressing trade secrets and other sensitive business information that the agency wants to protect, recognizing that it can no longer prevent former workers from competing with the business.  The FTC has made clear that as long as the courts have not struck down the rules, they will be in effect on September 4 and compliance is mandatory.

The situation regarding non-competes may become very complicated because of the array of state and federal laws that currently address the enforceability of trade secrets and other terms designed to protect sensitive business information. Absent conflict with the FTC rules, all state and federal laws governing non-competes remain fully enforceable according to their terms. This presents complications for advisor businesses that, for example, have workers in more than one state. The ultimate outcome of the litigation over the FTC’s new rules may entail major legal shifts in our understanding of the permissible scope of federal agency rulemaking. We will endeavor to keep the advisor community updated on significant legal developments as they occur.