3 Steps to Prepare for the FTC Noncompete Clause Rule

By Michael J. Houde, Goodell DeVries

On May 7, 2024, the Federal Trade Commission (“FTC”) published its Noncompete Clause Rule (the “Final Rule”) in the Federal Register. It is set to go into effect on September 4, 2024. On that date, with little exception, noncompete agreements across the country will be banned and unenforceable.

The Final Rule will have far-reaching implications for the policies and employment agreements of companies large and small. Employers have certain mandatory actions to take prior to the September 4, 2024, effective date; however, there are other key items you should know about the Final Rule along with steps you can take to prepare your organization for compliance.

Overview of the FTC Noncompete Clause Final Rule

The Final Rule defines a “noncompete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

  1. 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
  2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The Final Rule does not treat all workers equally; instead, it delineates between “standard employees” and “senior executives.”

A senior executive is “a worker who was in a policy-making position and who received from a person for the employment:

  1. total annual compensation of at least $151,164.00 in the preceding year;
  2. total compensation of at least $151,164.00 when annualized if the worker was employed during only part of the preceding year; or
  3. total compensation of at least $151,164.00 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a noncompete.”

Determining whether an employee holds a “policy-making position” depends on whether the employee has the authority to make decisions that affect the business or its operations. The employee’s job title is not considered, only their responsibilities and duties. For example, an employee who has the power to sign contracts with other people or entities on behalf of the employer is in a policy-making position.

The difference between these senior executives and standard employees is important, because any noncompete agreement an employer has entered into with a senior executive prior to September 4, 2024, will remain enforceable until the term of the agreement expires, regardless of whether it expires after September 4, 2024. However, after September 4, 2024, no senior executives may enter into any new noncompete agreements whatsoever.

The FTC’s justification for treating senior executives differently is that they are more likely to have entered into an employment contract with the benefit of counsel; they are more likely to have negotiated their compensation and other terms of their employment before entering into an agreement; and they are less likely to be subjected to the same acute harms that a standard employee would be subjected to (i.e., lack of transferrable skills, financial hardship, etc.).

The Final Rule also identifies other agreements that may not be noncompete agreements or contain noncompete language, but nonetheless operate as “functional noncompetes.” A functional noncompete can be a nondisclosure agreement, a confidentiality agreement, a nonsolicitation agreement, etc., that is so restrictive that it prevents an employee from leaving their current employment.

Here is an example of what a functional noncompete could look like. A mechanic employed by a garage performing complex services to high-performance exotic cars wants to leave their employer and start their own high-performance exotic car garage. But the mechanic has signed a nonsolicitation agreement. One of the terms of the nonsolicitation agreement states that if an employee leaves to start a competing garage, the employee is prohibited from performing any sort of advertising for the new business within the same state for one year after employment. The employer’s justification for this nonsolicitation clause is to protect against current customers seeing advertisements and choosing to go elsewhere to service their cars. The language of the nonsolicitation clause does not prevent the employee from opening their own garage; on its face, the language only restricts when and where the employee could advertise. Nonetheless, the advertising restriction causes the employee to feel that trying to start their own exotic car garage would be futile, and they are forced to remain with their employer instead. Because the effect of this nonsolicitation clause prevents the employee from competing in the marketplace, it would be considered a functional noncompete under the Final Rule.

Another functional noncompete identified specifically in the Final Rule is a “TRAP,” or a “training repayment agreement,” which is an agreement that would force an employee to repay the employer all or part of their wages earned if they leave their employment before a certain date. The fact that an employee could be subjected to severe financial hardship if they were required to repay the employer in order to leave their employment and is thus forced to remain with the employer is the clearest demonstration of a functional noncompete.

How to Prepare for the FTC Noncompete Clause Final Rule

With the September 4 effective date just a few months away, there are steps employers should take now to prepare for compliance.

  1. Issue the Required Notices

The first and most important step to take to comply with the Final Rule is to issue a mandatory “clear and conspicuous” notice to all standard employees currently subject to a noncompete agreement. Notice must be provided in writing, so having an oral communication or a phone call with an employee is, by itself, insufficient to satisfy the notice requirement.

Each employee must be notified in one of the following ways:

  1. on paper delivered by hand to the employee;
  2. by mail to the employee’s last known address;
  3. by email; or
  4. by text message to the employee’s cell phone.

Notifying employees simply by orally communicating with them in person or by phone is insufficient and does not satisfy the notice requirement.

The Final Rule includes model language for notifying the employee:

“A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of September 4, 2024, [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of September 4, 2024:

  • You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
  • You may run your own business—even if it competes with [EMPLOYER NAME].
  • You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean are available through the preceding URL.”

If you have standard employees who are currently subject to a noncompete and are not native English speakers, provide a copy of the notice in both English and the employee’s native language, if possible.

The model language constitutes the minimum amount of information required to comply with the Final Rule. Employers are free to incorporate additional language in the notice if they believe it necessary, so long as the substance and message of the proposed language remains the same. For example, it would be acceptable to use the above model language with additional language advising that nondisclosure clauses, confidentiality agreements, or non-solicitation agreements with the employee will remain in effect despite the lifting of the noncompete.

  1. Revise Internal Documents

In addition to providing the required notice to employees, revise all internal documents such as employee handbooks, manuals, policies, contracts, offer letters, termination letters, and other documents that incorporate noncompete language. For company-wide documents, these revisions should simply remove any language that states—explicitly or implicitly—that employees will be subject to noncompete agreements.

  1. Revise Employee-Specific Documents

Revise offer letters, termination letters, or employee-specific documents containing noncompete language based on whether the employee is a standard employee or a senior executive. For senior executives who have entered into a noncompete prior to September 4, 2024, provide written notice similar to the model language, but modified to advise those executive employees that they will remain subject to the existing noncompete agreement. This will ensure that all employees will have notice and understanding of how the Final Rule affects them.

Goodell DeVries stands ready to assist in preparing your organization for compliance while ensuring maximum protection of your trade secrets and other confidential and proprietary information. If you have questions about the Noncompete Clause Final Rule or require help in reviewing your organization’s agreements, policies, and other documents, please contact the author, Mike Houde, at mhoude@gdldlaw.com.

About Goodell DeVries

Goodell DeVries is a regional law firm with a national presence. Our team of attorneys handles the most complex legal challenges for clients across the country in business law, intellectual property, product liability, mass torts, medical malpractice law, appellate matters, complex commercial litigation, insurance, toxic torts, and more. Our lawyers are ranked among the best in the nation by leading directories, including Chambers and Best Lawyers, and we’ve been named among the top law firms for women by Law360. To learn more, visit www.gdldlaw.com or follow us on LinkedIn.