The FTC Rule on Employee Non-Competes Goes into Effect September 4: What Employers Need to Do Now

Originally published August 8, 2024:

You may have heard or seen in the news that on April 23, 2024, the Federal Trade Commission (the “FTC”) issued a Final Rule making most covenants not to compete between employers and their workers illegal and void (the “Rule”).  While several lawsuits have been filed challenging the Rule, unless a court issues a nationwide injunction to put it on hold, the Rule will go into effect on September 4, 2024.  This article will outline the steps that employers need to take now to prepare for the Rule if and when it goes into effect.

What the Rule Says

The new Rule prohibits most US employers from entering into, or attempting to enter into, a non-compete clause with a worker, including employees and independent contractors, or from representing that a worker is subject to a non‑compete clause.  The Rule applies retroactively to invalidate nearly all existing employee and contractor covenants not to compete.  There is a limited exemption from the Rule for non-competes in effect before September 4, 2024 with senior executives who both earn more than $151,164 per year and are in a “policy-making position,” meaning they have final authority to make policy decisions regarding significant aspects of a business entity or common enterprise.

While the Rule does not require employers to formally rescind all existing non-competes (other than for exempted senior executives) formally, they must nonetheless provide a written notice to those current and former employees and contractors advising them that their non-competes are no longer valid.  Employers must send this notice by September 4, 2024.  While there is no private cause of action for violation of the Rule, the FTC can sue employers who fail to comply, seeking civil penalties, restitution, damages, injunctive relief, orders of recission or reformation of contracts on behalf of damaged workers.  The FTC can also refer criminal matters to the U.S. Department of Justice for prosecution in appropriate cases.

For more information on the requirements of the Rule, please see our previous client alert.

The Notice Requirement

For each existing non-compete clause between an employer and a covered worker, including current and former employees and contractors, the employer must provide a written notice to the worker by the effective date of September 4.  The notice must:

1. Notify the worker, in clear and conspicuous language, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker;
2. Identify the person or entity who entered into the non-compete clause with the worker; and
3. Be delivered in writing, on paper, delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. 

The only exception to the notice requirement allowed by the Rule is for workers for whom the employer has no record of a street address, email address or mobile telephone number.  Employers should be careful to conduct a diligent search for contact information on a worker before relying on this exception.

While the Rule provides a form of notice that may be used by employers for this purpose, most employment attorneys will recommend that the employer seek legal guidance on the form and content of the notice.

Lawsuits to Halt the Rule

As predicted when the Rule was adopted, the Rule has faced a number of legal and constitutional challenges, including several lawsuits seeking to halt the FTC’s enforcement of the Rule.  To date, no court has issued an injunction that would stay enforcement of the Rule nationwide. 

On July 3, 2024, a federal district court in the Northern District of Texas found that the plaintiffs were likely to prevail on the merits of their claim that the FTC lacked authority to issue the Rule. In its ruling, the court issued a limited injunction that prohibits enforcement of the Rule, but only against the plaintiffs in the case.  While the court preliminarily declined plaintiffs’ request to issue a nationwide injunction, it agreed to hear arguments on why a nationwide injunction is appropriate. The parties are expected to present arguments on that and other issues in the coming weeks, and the court indicated that it will issue its final ruling on the merits, which may include a nationwide injunction, on August 30, which is just a few days before the Rule would go into effect. 

In contrast, about three weeks after the Texas ruling, a federal district court in the Eastern District of Pennsylvania declined to enjoin the Rule in a lawsuit filed there and held that the FTC did have the statutory authority to issue the Rule.  Another case challenging the Rule has been filed and is pending in the Middle District of Florida. 

Despite the first two judicial rulings reaching opposite conclusions, most legal scholars are predicting that the Rule will ultimately be halted or delayed.  In its July 3 preliminary decision, the Texas District Court laid the groundwork for finding that a nationwide injunction is appropriate in its upcoming decision on the merits.  However, because of the current uncertainty in the Rule’s future, and the short timeline between the Texas court’s expected final decision and the enforcement deadline, employers should start preparing now to take necessary action in the event that the Rule does go into effect on September 4.

What Employers Need to Do Now

In order to be prepared to comply with the Rule on September 4, employers should:

1. Conduct a thorough review of all existing personnel files and identify all current and former workers who signed covenants not to compete with the employer;
2. Determine whether any workers subject to non-compete clauses are senior executives who are exempt from the Rule;
3. Prepare a form of notice (a) stating that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker and (b) clearly identifying the person or entity who entered into the non-compete clause with the worker; 
4. Collect and prepare to send the form notice to each affected worker’s (a) current work email address; (b) last known personal email address, or (c) mobile telephone number for notice via text message.

Employers may also want to consider revising their form agreements, including employment agreements, stock grants, deferred compensation and similar plans or arrangements to eliminate non-compete clauses and focus on and enhance confidentiality, trade secrets and non-solicitation provisions, which are not affected by the Rule.
 

While the ultimate fate of the Rule remains uncertain, employers should be aware of this pending enforcement deadline and prepare to comply if the Rule is not stayed by a court.  If employers have questions about the Rule’s requirements or need assistance in preparing an appropriate notice or updating existing forms and agreements, they should contact their employment counsel.