April 23, 2024

The Federal Trade Commission (FTC) adopted by a 3-2 vote a revised, final version of its Noncompete Rule, to take effect 120 days after publication in the Federal Register. Once it takes effect people can report information about a suspected violation of the rule to the FTC Bureau of Competition by emailing noncompete@ftc.gov.

The final rule will: (1) apply to all entities subject to FTC jurisdiction (most notably excepting most non-profits and most government agencies); (2) ban all new noncompete contracts; (3) apply to “workers,” broadly defined to include independent contractors, apprentices, volunteers, etc.; and (4) require recission of existing noncompete agreements and includes prescribed notices to current and former employees of all “existing” noncompete contracts, provided that existing agreements with “senior executives” may remain in force, but new ones may not be imposed.

Other significant points in the final rule include: (1) language clarifying that the definition of a noncompete clause is not limited to clauses in written, legally enforceable contracts and applies to all forms a noncompete might take, including workplace policies or handbooks and informal contracts; and (2) language that existing noncompetes for senior executives can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them. The final rule defines senior executives as workers earning more than $151,164 annually and who are in “policy-making” positions.

To streamline compliance for employers, the FTC eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. Under the final rule, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To aid employers’ compliance with this requirement, the Commission has included model language in the final rule that employers can use to communicate to workers. 

The final rule also makes three revisions to the proposed rule’s definition of “worker,” including: (1) clarifying that the term covers all current and former workers; (2) removing “for an employer” from the definition to ensure that the final rule covers workers who are hired by one party but work for another, closing the “unintended loophole” identified by commenters regarding third-party hiring; and (3) adding “without regard to the worker’s title or the worker’s status under any other State or Federal laws” prior to the list of examples of different categories of workers that the definition covers. This change is designed to make more explicit that the term “worker” includes all workers, including independent contractors and apprentices (among others), regardless of their titles, status under other laws, or the details of the contractual relationship with their employer. The FTC did this because it “agrees with commenters that contended that excluding independent contractors from the definition of ‘worker’ could increase employers’ incentive to misclassify workers as independent contractors.”

With regard to Training Repayment Agreements (TRAPs) the FTC final rule says: “The Commission declines at this time to either categorically prohibit all TRAPs related to leaving employment, or to exempt such provisions altogether. The Commission agrees with comments raising substantial concerns about the potential effects of such agreements on competitive conditions. As noted in the summary of the comments, commenters cited TRAPs that impose penalties that are disproportionate to the value of training workers received and/or that claimed training expenses for on-the-job training. However, the evidentiary record before the Commission principally relates to non-competes, meaning on the present record the Commission cannot ascertain whether there are any legitimate uses of TRAPs that do not tend to negatively affect competitive conditions. When TRAPs function to prevent a worker from seeking or accepting other work or starting a business after the employment associated with the TRAP, they are non-competes under § 910.1.”

The FTC also rejected comments to exempt the construction industry from the ban on noncompetes because of assertions that noncompetes are necessary for investment in innovation and productivity in the construction industry.

Finally, the FTC declined to exempt industries that rely on apprenticeships to train workers, saying: “The Commission declines to exclude industries, such as real estate appraisal, plumbing, and veterinary medicine, in which an industry must purportedly invest in significant training or apprenticeship of workers before the employer considers them to be productive. The Commission finds that these employers have less restrictive alternatives—namely fixed duration contracts—to protect their investment in worker training. A return on investment in the training does not require that the worker be unable to work for a period after leaving employment. Moreover, employers stand to benefit from the final rule through having access to a broader labor supply—including incoming experienced workers—with fewer frictions in matching with the best worker for the job.”

© 2024 Signatory Wall and Ceiling Contractors Alliance (SWACCA). All rights reserved.