FTC Ruling Regarding Non-Compete Clauses: What You Need to Know

The new Federal Trade Commission (FTC) ruling regarding non-compete clauses becomes effective on September 4, 2024, after its publishing on May 7, 2024. The rule may be challenged in court, potentially delaying or stopping its implementation.

However, it’s still important to start reviewing your contracts now to be ready to deal with this compliance when it takes place. The FTC rule overrides any state law allowing non-competes.

Employers must notify current and former employees with unenforceable non-competes by September 4th; this rule applies to a wide range of workers such as regular employees, independent contractors, interns, and volunteers. It applies retroactively, voiding existing non-compete agreements except for senior executives. Existing non-competes with senior executives earning more than $151,164 and holding policy-making positions can remain in place, but new non-competes with senior executives are prohibited.

The FTC's new rule casts a wide net to capture not only traditional non-compete agreements but also any contractual provision that has the effect of hindering a worker's ability to pursue future employment opportunities. This encompasses:

1. Express prohibitions: Clauses explicitly barring a worker from seeking or accepting competing employment after termination.
2. Penalizing competition: Provisions that financially penalize a worker, such as liquidated damages clauses, for working for a competitor post-employment.
3. De facto non-competes: Seemingly innocuous clauses that functionally restrict future employment. For instance, an overbroad non-disclosure agreement (NDA) defining "confidential information" to encompass industry-standard knowledge could be deemed a de facto non-compete, as it effectively prevents the worker from leveraging their skills in that industry elsewhere. Similarly, a liquidated damages clause triggered by early termination might be viewed as a deterrent to seeking new opportunities.

So what does this mean for employers contractually? 

A review of all your contracts that contain clauses that are affected by this ruling. LinkSquares AI can review many of these with our out-of-the-box smart values, specifically;

• Non-compete clause

• Limitation of liability clause

• Confidentiality clause
• Non-solicitation clause

Our Type Classifier also provides a breakdown of your contracts to allow specific review of any pertinent language in;

• Non-disclosure agreements  
• Non-solicitation agreements
• Non-Compete agreements 
• Compensation agreements: Compensation agreements like severance (without competing restrictions) 
• Training repayment agreement provisions: These are generally allowed unless they prevent a worker from seeking or accepting other work or starting a business after their employment ends.

LinkSquares can also create custom values for any pertinent language in your contracts such as;

• Forfeiture-for-competition clauses: Clauses penalizing workers for competing after leaving are prohibited. This includes severance agreements conditioned on not competing.
• Sale-of-business exception: Non-competes are allowed in connection with the sale of a business entity, all or substantially all its operating assets, or an individual's ownership interest.

LinkSquares provides early preparation which allows employers to meet the compliance deadline of September 4, 2024. This necessitates reviewing existing contracts, crafting compliant language for new hires, and potentially notifying current employees about unenforceable non-compete clauses. This will allow employers to adapt to the new legal landscape, mitigate legal risks, and develop alternative talent retention strategies.