Noncompete Ban Update: FTC Holds Compliance Guidance Meeting

At a Glance

• This alert summarizes the commentary and guidance provided by FTC staff — which is not binding on the FTC itself — during the May 14, 2024, webinar.

On May 14, 2024, the U.S. Federal Trade Commission (FTC) held a webinar to provide further public guidance on compliance with its final rule that bans noncompete agreements for the vast majority of workers before it goes into effect on September 4, 2024. The FTC previously released a Fact Sheet and Compliance Guide for businesses at a dedicated site for the rule. 

Effective Date  

The rule banning noncompete agreements, including new noncompete agreements for senior executives, will be effective on September 4, 2024. If the effective date is delayed due to the ongoing legal challenges to the rule, the FTC will provide updated information on its website.

Exclusions

The rule does not apply to noncompete agreements: 

1. With businesses outside of the FTC’s jurisdiction (e.g., banks and certain nonprofit organizations) 
2. In franchisee-franchisor relationships (although the rule applies to employees who work at franchises) 
3. In connection with the sale of a business entity (although, like a franchised business, the rule applies to the sold business’ workers).  

During the webinar, the FTC again cautioned that nonprofit organizations should not assume that they are outside of the scope of the FTC’s jurisdiction based solely on their tax-filing status.

Covered Workers

The rule applies to all workers, whether full-time or part-time, and specifically includes employees, apprentices, independent contractors, volunteers and interns. 

Notices

The rule requires employers to issue notices to current and former non-senior executive workers that their noncompete agreements are unenforceable which must be delivered either by hand, mail, email or text message before the effective date.  

Employers can satisfy the notice requirement for current employees by sending the FTC’s model notice in an all-staff email.  

Employers will be exempt from the notice requirement for former workers, on an individual basis, if the employer does not have a record of that employee’s street or email address or mobile telephone number.  

Additionally, employers must provide the notice in English but may choose to provide the notice in additional languages. The FTC has provided the model notice in six additional languages.

Senior Executives 

The rule allows existing noncompete agreements to remain in place only for certain “senior executives” after the effective date. Senior executives are workers “earning more than $151,164 annually” and in positions with authority to make policy decisions for the entire company.  

The compensation figure includes salary, bonuses and equity, but does not include benefits or board and lodging.  

Additionally, if they have final authority, workers are making policy decisions that control significant aspects of the business as a whole without a higher-level employee’s approval; it is not enough for an employee to have authority to simply advise or influence policy decisions.  

Alternatives to Noncompete Agreements  

The rule defines a noncompete agreement as a term or condition that “prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment.”  

During the webinar, the FTC clarified that garden leave agreements and customary nondisclosure agreements, nonsolicitation agreements, and training repayment agreements will not run afoul of the rule unless those are designed to (1) prohibit a worker from getting another job; (2) require a worker to pay a penalty; or (3) effectively restrict or prevent a worker from getting another job.  

Employers using any of these agreements should be careful to narrowly tailor those restrictions. For example, the FTC suggested that employers should limit the scope of nonsolicitation agreements to clients that the worker actually engaged with and performed work for during the course of their employment. Employers should not seek to prohibit the solicitation of all clients the business had at any time during the course of the worker’s employment as that could effectively restrict the worker’s ability to get another job depending on the company’s size. By way of further example, training repayment agreements should reflect the value of the training and should not include liquidated damages or other fee provisions which are unmoored from the business’s actual expenses incurred.

Looking Ahead

We will continue to monitor these important developments and, like our prior alerts on this topic, address questions raised by the new rule and the business and legal implications for employers.