FTC Issues Final Rule Banning Non-Compete Clauses; Labor Department Releases Rule on Overtime

The Federal Trade Commission (FTC) issued a final rule on Tuesday, April 23, that bans non-compete clauses nationwide in most contexts. Also Tuesday, the U.S. Department of Labor released a final rule raising the salary thresholds for overtime exemptions (further discussed below).

Under the FTC’s new non-compete rule, existing non-competes for most workers will no longer be enforceable. Such agreements for senior executives can remain in force, but employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives.

The final rule will become effective 120 days after publication in the Federal Register, though legal challenges are expected that may impact the rule’s ultimate effective date.

New non-compete agreements are already prohibited in Minnesota in most contexts, following a bill that passed last year and became effective on July 1, 2023.

Who Is Covered by the FTC Rule?

The new non-compete rule applies to non-compete clauses with a "worker," which is defined as "an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person." The definition further states that the term "worker" includes a natural person who works for a franchisee or franchisor, but it does not include a franchisee in the context of a franchisee-franchisor relationship. The rule, therefore, does not prohibit non-competition provisions in franchise agreements that restrict the franchisee from competing with the franchisor post-term.

What About Other Agreements that Function as Non-Competes?

The new rule does not categorically prohibit other types of restrictive employment agreements such as non-solicitation agreements, non-disclosure agreements (NDAs), and training repayment agreement provisions (TRAPs). However, the FTC said that if an agreement "functions to prevent" a worker from seeking or accepting other work or starting a new business after their employment ends, such an agreement is considered a non-compete clause under the new rule.

Am I Required to Notify Workers?

Employers will be required to provide notice to workers other than senior executives who are bound by an existing non-compete that they will not be enforcing those agreements against them. Notification must occur by the effective date of the final rule.

Employers can provide the notice by hand or through the mail, email, or a text message, and they are not required to do so if they have no method of contacting a worker by paper or digital format. An employer is required only to notify workers that existing non-competes are no longer in effect.

What Are the Implications for State Laws?

The new rule would supersede any state law that is inconsistent with it; though if a state has a more stringent requirement for employers, it would remain in effect.

Are There Any Exceptions to the Rule?

Companies may continue to enforce existing non-competes against senior executives, defined as those in a "policy-making position" who make more than $151,164 per year, but future non-competes with those executives would be banned.

Additionally, the FTC provided a limited exception for non-competes entered into by a person who is selling a business. In a change from the proposed rule, the FTC removed language that the restricted party be “a substantial owner of, or substantial member or substantial partner in, the business entity” to fall under the exception.

Steps Employers Should Take

• Ensure that you are adequately protecting your trade secrets, intellectual property, and confidential information through practical, technical, and contractual measures.
• Ensure your employment contracts include a severability clause.
• Consider whether your interests can be adequately protected by a non-solicitation agreement, and work with legal counsel to ensure that the agreement is drafted narrowly so it is not construed as a non-compete under the new rule.

New Labor Department Rule on Overtime

In related employment news, the U.S. Department of Labor issued a final rule April 23 that increases the salary thresholds for exempting salaried employees from federal overtime pay requirements.

Under the new rule, effective July 1, 2024, the salary threshold will increase from $35,568 to the equivalent of an annual salary of $43,888. On Jan. 1, 2025, the salary threshold rises to $58,656, and subsequent increases will occur every three years.

We Can Help

If you have questions about how to protect your company’s legitimate business interests in the midst of this changing regulatory landscape, please contact Maslon's employment and non-compete attorneys.