In late April, the Federal Trade Commission (FTC) announced its Final Non-Compete Clause Rule (“Final Rule”). Set to take effect on September 4, the final rule will both ban the use of existing non-compete agreements for most workers of for-profit employers and ban all new non-compete agreements from being entered after the effective date.

The primary exception to note, is that the final rule adopts a different approach for senior executives than all other workers. Unlike all other workers, the rule stipulates that existing non-compete agreements remain valid for senior executives. Notably, employers will not be permitted to ask senior executives to sign new agreements containing non-compete provisions after the effective date — at that point, only pre-existing agreements will remain valid. The FTC ruling defines senior executives as workers earning more than $151,164 annually in total compensation and holding policy-making positions.

To better understand the nuances of the final rule and provide insight for CEOs on how to plan for when it takes effect this Fall, we sat down with attorney Andrew Gallinaro, a Partner at Fisher Phillips who specializes in restrictive covenants. Here’s what CEO’s and business leaders need to know about the new ruling.

Addressing Existing Non-Competes

  • Developing & Revising Existing Employment Agreements: To comply with the final rule, Gallinaro suggests that businesses should review their entire suite of existing employment agreements to ensure that new agreements entered after the Rule’s effective date are compliant. Notably, businesses will not need to amend their existing agreements, but they are required to notify affected employees that their non-compete provisions are no longer valid.
  • Utilizing Alternatives to Non-Compete Agreements: While the final rule bans non-competes, it does not categorically prohibit other types of restrictive employment agreements such as non-solicitations, non-disclosures, and training-repayment agreements. As a result, Gallinaro anticipates an increased emphasis in the aforementioned offerings as substitutes for non-compete clauses. He further suggests that although under the final rule Employer A cannot entirely prohibit their employee from working for Employer B, they can still take steps to protect their interests via the enforcement of robust non-solicitation and non-disclosure provisions.
  • Notifying Current and Former Workforce: Employers are bound to notify their current employees, as well as former employees that are subject to non-compete restrictions, about the unenforceability of their non-compete agreements once the ruling takes effect. Notification must be prompt following the effective date and extended to all affected existing and former employees of the firm. Gallinaro recommends that Employers begin this process now by notifying employees of the Rule and that it is not yet effective to avoid confusion. If the Rule becomes effective, employers should carefully review the notification requirements to ensure compliance.

The Impact on Current Executive Teams

  • Determining a “Policy-Making” Role: According to Gallinaro, the FTC provides a broad definition of a policy making role that has the potential to create ambiguity surrounding businesses’ determination of who constitutes a Policy-Maker. Generally, he advises that C-suite leaders will be considered senior executives and will fit within the exception that allows their existing non-compete restrictions to remain valid. The greater challenge will be in determining whether existing agreements remain valid with respect to other types of executives within an organization, particularly within the Vice President ranks where roles and responsibilities can vary widely between organizations. Additional ambiguities are likely to arise for executives in startup ventures who may not be receiving a salary, along with leaders of subsidiaries. Careful consideration and analysis of the FTC’s rule will be necessary when evaluating whether such individuals are exempt from the ruling.
  • Sale of Business: The FTC ruling makes an additional exception concerning the sale of a business. Non-compete clauses entered in connection with a “bona fide sale” of a business are exempt from the rule assuming that sale involves the disposition of the person’s ownership interest in the business entity.

Ambiguity & Future Developments of the Ruling

Legal experts anticipate resistance from employers and business organizations. In fact, several lawsuits challenging the Final Rule were filed immediately upon its announcement in Texas and Pennsylvania. The rulings in those lawsuits could lead to delays of the effective date, or possibly a nullification of the rule in its entirety.

Gallinaro explained that the Ryan LLC V FTC case pending in the Northern District of Texas is leading the way and will likely be the first court to address the enforceability of the FTC’s Final Rule. The court committed to making a decision on the Plaintiff’s request for an injunction against the rule by July 3, which could result in a ruling that would delay or prevent the rule from going into effect nationwide. After this date, employers should have more guidance on when and how they need to prepare for the rule’s implementation.

Many spectators believe that these legal challenges will eventually be taken to the Supreme Court for a determination on whether the FTC’s ban exceeds the agency’s authority.

Key Takeaways & Considerations for CEOs and Business Leaders:

Navigating the ambiguity surrounding this new rule can be daunting for business leaders, but compliance remains imperative in the upcoming months. Uncertainties aside, Gallinaro suggests the following 3 immediate actions:

  • Figure out who is impacted: Employers should carefully review their rosters to determine who is impacted and to identify any contracts that need to be adjusted, as well as prepare to make judgement calls based on potential exemptions.
  • Draft compliant employment agreements: Employers should diligently draft employment agreements that adhere to the new regulatory requirements to ensure compliance with the FTC rule, while ensuring that business interests are still protected through other forms of restrictive covenants unaffected by the Rule.
  • Have a communication plan: Once effective, the Rule requires employers to communicate with all impacted current and former workers, informing them that certain provisions of their existing employment agreement are no longer enforceable. The notification should clearly communicate and outline the impact of the FTC’s rule on existing agreements.

Given the challenges that will likely arise prior to the effective date, it is critical that leadership teams continue to monitor developments as they unfold. From navigating the impact on current teams to developing new recruitment and hiring processes, executives should focus on driving effective communication, utilize external resources when needed, and remain flexible to any ongoing changes in the rule.

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