Those in the greater New York metropolitan area felt an earthquake a few weeks ago. Yesterday there was a much stronger one that will be felt for years to come across the United States. It resulted from the Non-Compete Clause Final Rule (the “Rule”) issued yesterday in a 3 to 2 vote by the Federal Trade Commission.
While the Rule does not preclude non-compete clauses pursuant to the sale of businesses or existing non-compete clauses for “Senior Executives”, it bars existing non-competes for all other “workers” defined broadly to include, among others, employees, independent contractors and sole proprietors. It also bars future non-compete clauses for all workers, including Senior Executives. Section 910.01 defines a non-compete clause as a term of employment that “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from seeking or accepting work. “Prohibits” is easy enough to understand. “Penalizes” and “functions to prevent” are meant to preclude, for example, a forfeiture-for-competition clause, such as foregoing certain retirement benefits should an employee go to work elsewhere or an overly broad non-solicitation clause or a non-disclosure agreement (“NDA”) that effectively takes a worker out of the marketplace.
For non-senior executives with non-competes currently, they will end as of the effective date of the Rule (120 days after it is published in the Federal Register). The Rule finds that, for these persons, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that a worker is subject to a non-compete clause. Moreover, the Rule requires clear and conspicuous notice to be sent to all workers currently with non-compete clauses that will be unenforceable due to the Rule.
Finally, an earnings test and a job duties test are used to define those who are considered “Senior Executives.” Senior Executives must earn at least $151,164 per annum (including salary, bonus and commissions) and must be in a “policy making position”. How this definition applies will be hotly litigated for years to come. What the Rule does make clear is that it includes a President, CEO or equivalent, or any other person with “policy-making authority” for significant aspects of a business entity or common enterprise.
The Rule was not unexpected but it makes sweeping changes across all State lines when, in the past, these decisions were made at the State level. It will have major implications not only for approximately 30 million U.S. workers currently subject to non-competes but many other workers as well, assuming it withstands legal challenges. We expect the U.S. Chamber of Commerce to file suit imminently. Stay tuned for a more detailed analysis in our Employment Law Blog.
Learn More: Fact Sheet on FTC’s Proposed Final Noncompete Rule