Non Compete Rule

The FTC Rule on Non-Compete Agreements is a federal regulation that prohibits employers across all states from using non-compete clauses with their employees and independent contractors.

This rule marks a significant shift in labor policy, aiming to enhance career mobility and reduce restrictions that limit workers from moving freely within their industry sectors or starting new ventures.

The legislation is part of broader efforts to foster innovation, raise wages, and boost economic dynamics by allowing more freedom for individuals to apply their skills where they choose without contractual limitations.

Before you start creating your Non-Compete Rule form, it's a good idea to review a sample first. This will help you understand what the legal document should look like and what it should include.

The FTC Non-Compete Rule prevents employers from creating or enforcing non-compete agreements with employees and independent contractors. This rule targets these agreements at a national level.

Under the rule, non-competes are considered automatically illegal with very few exceptions, such as in cases related to the sale of a business. Employers must also issue written notices to employees, clearly stating that past non-compete agreements will no longer be enforced.

On April 23, 2024, the FTC issued its final rule changing how non-compete agreements are handled nationwide. This new rule will start on September 4th, 2024. The final rule adopts a different approach for senior executives than other workers. For senior executives, existing non-competes can remain in force, while existing noncompetes with other workers are not enforceable after the effective date.

The FTC's new rule generally prohibits non-compete agreements, but there are key exceptions that permit their use under specific circumstances:

Senior Executives

This exception applies to senior executives with an existing non-compete agreement involved in key decisions.

Senior executives are defined as individuals who (1) were “in a policy-making position” and (2) received a total annual compensation of at least $151,164 in the preceding year.

Bona Fide Business Sale Exception

Non-competes during the sale of a business by a substantial owner of, or substantial member or substantial partner in, the business entity are permitted by this exception.

Existing Causes of Action

The rule does not apply to a cause of action related to a non-compete clause that accrued before the effective date.

Other Significant Exceptions

The rule does not apply to entities not subject to the jurisdiction of the FTC, such as non-profit organizations.

The not-for-profit jurisdictional exemption requires that there be an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests.

Additionally, the rule does not apply to franchisee/franchisor contracts.

These exceptions are designed to balance the protection of workers' employment mobility with the need for businesses to protect sensitive information and investments in certain high-stakes situations.

When creating a Non-Compete Rule due to the new FTC regulations, you must include certain details to meet legal standards and ensure employees understand the changes.

1. Effective date: Clearly state when non-compete clauses will stop being enforced.
2. Definition of non-compete: Explain that employees can work for a competitor, start similar businesses, or compete after leaving the company.
3. Employer identification: Name the employer to whom the rule applies.
4. Scope of non-enforcement: Specify that the non-compete clause will not be enforced in any way.
5. Exclusions and obligations: Mention that other agreements like confidentiality remain in effect.
6. Resource for more information: Provide a link or directions to additional information about the rule.

These elements ensure the Non-Compete Rule document is thorough, follows the FTC’s guidelines, and is understandable, helping to avoid future disputes and create a transparent workplace.

If you're in the process of drafting a FTC Non-Compete Rule form, consider these additional documents that could better meet your legal requirements:

• Non-Compete Agreement
• Employment Contract