Federal Trade Commission Issues Landmark Non-Compete Rule
The Federal Trade Commission (“FTC”) recently issued a landmark final rule dealing with non-compete clauses which is of massive importance in the employer-employee context. 16 CFR Part 910 was published on April 23, 2024. This Non-Compete Clause Rule provides that non-compete clauses are an unfair method of competition following today’s rule. However, the new Rule delineates differences between non-competes issued to senior executives and other workers.
For senior executives, existing non-compete clauses can remain in full force. However, non-compete clauses with non-senior executives are no longer enforceable, even if entered into before the date of this final rule.
For non-senior executives, existing non-competes are no longer enforceable after the Rule’s effective date. Employers are obligated to provide non-executive employers notice that they are no longer enforceable. For non-senior executives, the FTC has determined that it is an unfair method of competition to (1) enter into a non-compete clause; (2) to attempt to enter into a non-compete clause; (3) to enforce or attempt to enforce a non-compete clause; or (4) to represent that a worker is subject to a non-compete clause.
For senior executives, it is an unfair method of competition (1) to enter into a non-compete clause; (2) to attempt to enter into a non-compete clause; (3) to enforce or attempt to enforce a non-compete clause entered into after the effective date of the Rule; or (4) to represent that a senior executive is subject to a non-compete clause if it was entered into after the effective date of the Rule.
A senior executive is defined based on an earnings test and a job duties test. A senior executive refers to workers earning more than $151,164.00 who are in a “policy-making” position. The FTC intends this to be an “and” test. To qualify as a senior executive, an employee must make both more than $151,164.00 and be in a policy-making position. The job duties test is more nuanced than the earnings test. It focuses on duties rather than job titles. A business entity’s president, CEO (or equivalent), or any other person with policy-making authority holds a policy-making position. Other positions may also be defined as senior executives. Further, a person who has final authority to make policy decisions that control significant aspects of a business entity or common enterprise satisfy the job duties test to qualify as a senior executive.
For purposes of this Rule, a non-compete clause is 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.”
This Rule does not apply to non-compete clauses entered into by persons pursuant to a bona fide sale of a business entity. The Rule also does not apply to causes of action related to non-compete clauses which accrued prior to the effective date of the Rule. Further, the Rule explicitly carves out that it not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause when a person has a good-faith basis to believe the Rule is inapplicable.
About: Shuman McCuskey Slicer PLLC is a civil defense litigation law firm defending businesses, professionals, and insurers in high-stakes litigation. The firm has over 20 attorneys licensed to practice in West Virginia, Virginia, Ohio, Kentucky, and Pennsylvania. SMS was founded in Charleston, WV, where it remains headquartered and has additional offices in Morgantown, WV, and Winchester, VA.
Stay up-to-date with SMS by connecting with us on Facebook and LinkedIn and subscribing to our quarterly newsletter.