What Michigan Employers Need To Know About The FTC’s Sweeping Final Rule Banning Most – But Not All – Non-Competes

Woman tearing up document.Non-competition agreements have long been a staple in employment contracts, serving as a critical tool for businesses to safeguard their proprietary information and maintain competitive advantage. But in the eyes of an ever-increasing number of judges, state legislatures, and employee advocates over the past several decades, non-competes are an unfair and crippling limitation on the rights of individuals to pursue opportunities in their chosen job, career, or profession. This state-by-state attack on non-competes is now a federal one, with the Federal Trade Commission’s recent approval of a contentious Final Rule that bans most – but not all – existing and future non-competition agreements nationwide.

Unsurprisingly, litigation challenging the rule’s legality was filed within hours of the rule’s publication. But short of judicial intervention, the rule will become effective on September 4, 2024. This means that employers should begin preparing themselves for a post-non-compete world, starting with understanding what the Final Rule prohibits, what it allows, and what is required for compliance.

Definition of Non-Compete Clause

Under the Final Rule, a “non-compete clause” is defined as “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

  • 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
  • Operating a business in the United States after the conclusion of the employment that includes the term or condition.”

Non-Solicitation and Disclosure Agreements OK – If They Don’t Act As Non-Competes

The Final Rule does not prohibit non-disclosure or non-solicitation agreements. However, if any such provision effectively “prohibits,” “penalizes,” or “functions to prevent a worker from” seeking or accepting work after the termination of their employment, the FTC may deem it to be a prohibited non-compete no matter what it’s called. The FTC states that whether any given agreement constitutes a “non-compete clause” is a “fact-specific inquiry.”

Non-Competes Banned For All Workers Other Than “Senior Executives”

Other than “senior executives,” as discussed below, the Final Rule prohibits all non-competes for employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service to a person, and a person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.

The Final Rule deems it unfair to enter into or attempt to enter into a non-compete clause, to enforce or attempt to enforce a non-compete clause, or to represent that the worker is subject to a non-compete clause.

Existing Non-Competes For “Senior Executives” Allowed, Future Ones Banned

The Final Rule does not void any existing non-competes involving “senior executives.” However, it does prohibit employers from entering into, enforcing, or attempting to enter into or enforce new non-competes with senior executives after the Final Rule’s effective date.

A “senior executive” is an individual in a “policy-making position” who earns an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments). A “policy-making position” includes a company’s president, chief executive officer, or the equivalent, any other officer with policy-making authority, or any other person with policy-making authority for the business similar to that of an officer with policy-making authority.

Sale Of Business and Other Exceptions

The Final Rule does not apply to non-competition provisions entered into pursuant to a bona fide sale of a business entity, so long as the sale involves the disposition of the person’s ownership interest in the business entity, or all or substantially all of the entity’s operating assets.

The Final Rule also does not apply to causes of actions related to non-compete clauses that accrued prior to the effective Date. Additionally, there is a “good faith” exception to the Final Rule.

Employer Notice Requirements

Under the Final Rule, employers need to provide notice to any employee, other than senior executives, currently subject to a non-compete that the agreement will not be enforced against them. To help employers comply with this requirement, the FTC included model language in the rule that employers can use to satisfy this requirement.

Rule Preempts Less Restrictive State Laws

The Final Rule “supersedes” any state laws regarding non-competes to the extent that they are inconsistent with the rule, though states are free to pass laws that go beyond the “protections” the rule provides. As such, businesses with employees in multiple jurisdictions should remain cognizant of any state laws on the subject.

Regardless of the Final Rule’s ultimate judicial fate, employers that rely on non-competition provisions to protect their business interests should engage counsel to review non-competition language in employment agreements and consider other options for protecting trade secrets and confidential information.

To discuss how the FTC’s Final Rule will impact your business and your workforce, please contact one of our Employment Law attorneys.

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