The FTC Has Banned Non-Compete Clauses. Here’s What You Need to Know.

Lucia E. DeFilippo and Bruce E. Loren
May 9, 2024

On April 23, 2024, the Federal Trade Commission (“FTC”) approved a final rule banning non-compete clauses nationwide. The final rule is to take effect 120 days after the date of publication in the Federal Register. Many are anticipating that the effective date will be in late August or early September 2024. The stated purpose of the rule is to promote competition and innovation. The FTC’s new rule declares it to be a prohibited “unfair method of competition” for an employer to:

  • enter into or attempt to enter into a noncompete clause with a worker after the effective date;
  • enforce or attempt to enforce a noncompete clause entered after the effective date with a senior executive or future noncompete clause with any worker; or
  • represent to a worker, other than a senior executive with an existing noncompete clause, that the worker is subject to a noncompete clause.

While there has already been a lawsuit instituted against the FTC challenging the constitutionality of the final rule, including whether the rule must be passed as a law by Congress, it is important you know how this final rule will affect your rights and those of your company.  This article will explain the basic parameters of the final rule, and what employers need to do to comply.

I. What is a non-compete clause and how is it different than a non-solicitation clause?

A non-compete clause is a provision that restricts an employee’s ability to work for a competitor after the employee leaves the employer’s place of business. The final rule defines a “non-compete clause” as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

  • seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
  • operating a business in the United States after the conclusion of the employment that includes the term or condition.”

Except for the sale of a business restricting a former principal from competing, most courts have been very hesitant to enforce these restrictions.  If the new FTC rule stands, these non-compete restrictions will be unenforceable.

A non-solicitation clause, on the other hand, is a contractual provision that prohibits an employee from soliciting the employer’s customers, clients, employees, or contractors for a certain period of time after leaving the firm or place of employment. The FTC’s final rule does not expressly prohibit non-solicitation agreements, because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily prevent a worker from seeking or accepting other work or starting a business. However, non-solicitation agreements may fall within the definition of a non-compete clause if they restrain such an unusually large scope of activity that they are in essence non-compete clauses. For example, if the non-solicitation agreement prevents a worker from seeking or accepting other work or starting a business after their employment ends, the non-solicitation agreement would fall within the definition of a non-compete clause under the FTC final rule.

II. Who does this affect and who is excluded?

The final rule does not make a distinction between independent contractors or employees. Instead, the final rule applies to all “workers,” which is defined as, “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws.”

The final rule will not affect existing non-competes for high-level or “senior executives” who make over $151,164 and are in a “policy-making position.” The final rule defines a “senior executive” as a worker who:

(1) was in a policy-making position; and

(2) received from a person for the employment

(i) Total annual compensation of at least $151,164 in the preceding year; or

(ii) Total compensation of at least $154,164 when annualized if the worker was employed during only part of the preceding year; or

(iii)  Total compensation of at least $154,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from the employment prior to the preceding year and the worker is subject to a non-compete clause.

“Policy-making authority” means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and 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. Therefore, this includes a business entity’s president, chief executive officer or the equivalent, and any other officer of a business entity who has policy-making authority.

Employers are banned from entering into or attempting to enforce any new non-compete clauses, even if they involve senior executives. Importantly, the final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity either.

III. How does this affect Florida law on non-compete clauses

The final rule preempts state laws that conflict with the final rule. Florida law currently allows for non-compete clauses, provided they are reasonable in terms of duration, the area covered, and the type of business involved. Generally, they cannot exceed 2 years, and they cannot force the employee to refrain from working in the entire state. Therefore, the FTC final rule will likely take precedence and supersede Florida Law.

IV. What if you are currently involved in litigation concerning the breach of a non-compete clause?

The final rule does not apply to where a cause of action related to a non-compete clause accrued prior to the effective date. The word “accrued” is not defined in the text of the final rule, however, the FTC has stated that the final rule does not render any existing non-competes unenforceable or invalid from the date of their origin. Instead, it is an unfair method of competition to enforce certain non-competes beginning on the effective date of the final rule. Actions taken before the effective date—for example, enforcing an existing non-compete or making representations related to an existing non-compete—are not unfair methods of competition under the final rule. So, if you are currently litigating the validity or breach of a non-compete clause, the final rule will likely not apply to you.

For those employers that currently have workers that are subject to a non-compete clause, the final rule states that you are required to notify the employee by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. If you fall into this category, please call our office so we can draft the necessary language the FTC requires.

V. Alternatives to Non-Compete Clauses

Trade secret laws, non-disclosure agreements (NDA), and non-solicitation agreements provide employers with well-established means to protect proprietary and other sensitive information. The FTC suggests increasing wages to workers, which is one of the agency’s stated purposes for the final rule. Because of the current litigation instituted by the U.S. Chamber of Commerce against the FTC concerning the constitutionality of the final rule, it is unclear whether enforcement will proceed on the effective date. However, if upheld by the courts, it is important that you contact our office so we can counsel you on your rights. We will provide more information as it becomes available.

Bruce E. Loren, and Lucia E. DeFilippo of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Loren has achieved the title of “Board Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mrs. DeFilippo can be reached at bloren@lorenkeanlaw.com or ldefilippo@lorenkeanlaw.com or 561-615-5701.