What is the new Federal Trade Commission Rule regarding Non-Compete Clauses?
The new rule prohibits non-compete agreements except in very limited circumstances. The FTC views non-compete clauses as an “unfair method of competition.”
What is a Non-Compete Clause?
A non-compete clause limits or prohibits a “worker” from seeking or accepting work, or starting a business, after the conclusion of employment.
The FTC rule defines a “non-compete clause” as “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.”
What is a “worker” under the FTC Rule? Will this rule apply to independent contractors as well?
The FTC Rule defines a “worker” broadly to include an employee, independent contractor, volunteer, intern, extern, apprentice, and sole proprietor.
What are the exceptions?
Some senior executives with existing non-compete clauses, and certain business sales, will likely be exempt.
Certain non-profits, banks, savings and loan institutions, common carriers, air carriers, and businesses subject to the packers and Stockyard Act will be exempt.
What is the effective date?
Currently, the rule will go into effect September 4, 2024.
What happens after the FTC rule goes into effect?
With limited exceptions, employers will not be able to enforce existing non-compete clauses after September 4, 2024.
What do employers need to do to comply with the FTC rule?
Among other things, employers must provide “clear and conspicuous notice” to workers by September 4, 2024, that the workers’ non-compete clause is no longer enforceable.
Non-compete clauses in Colorado: are non-compete clauses still enforceable in Colorado?
With limited exceptions, non-compete clauses will likely become unenforceable in Colorado after the new Federal Trade Commission Rule goes into effect on September 4, 2024.
What are the Colorado exceptions for non-compete clauses? Is there a ban on non-compete clauses in Colorado?
Current Colorado law exempts highly compensated employees (who make over $124,750 in 2024) where a non-compete provision is necessary to protect the employer’s trade secrets. There are also exceptions to cover certain tuition and training expenses, the purchase and sale of a business or business assets, repayment of scholarships, and to reasonably protect confidentiality related to the employer’s business. Employers must give notice to employees for these exemptions to apply. While there is not a complete ban on non-compete clauses in Colorado, the exceptions are limited.
Has the new FTC rule been challenged?
There are currently three lawsuits challenging the FTC Rule (one in the Northern District of Texas, one in the Eastern District of Texas, and one in the Eastern District of Pennsylvania). The outcome of those lawsuits is pending.
How many workers in the U.S. are subject to a non-compete clause?
The FTC estimates that one in 5, or approximately 30 million workers in the U.S., are subject to non-compete clauses. This includes low-wage and middle-income workers.
To learn more about how to comply with the FTC rule and how it may affect you or your business contact:
Kelcey Nichols, knichols@garfieldhecht.com
Leah Gallant, lgallant@garfieldhecht.com
