FTC Approves Final Rule Banning Non-Competes, Immediately Gets Sued; Increase in FLSA Salary Thresholds Impacts MA, RI Non-Compete Law
FTC Approves Final Rule Banning Non-Competes, Immediately Gets Sued
On April 23, 2024, the Federal Trade Commission voted 3 to 2 to issue a Final Rule banning nearly all non-compete agreements, with very limited exceptions. This is the culmination of the July 2021 Executive Order on Promoting Competition in the American Economy, in which President Biden called on the FTC to “curtail the unfair use of non-compete clauses[.]”
What Does the Final Rule Do?
The Final Rule reflects some changes from the original Notice of Proposed Rulemaking (NPRM), but the substance is the same.
First, the FTC is allowing enforcement of existing non-compete agreements with “senior executives”—an extremely limited population, which the FTC estimates to constitute fewer than 0.75% of all workers. But after the effective date (120 days after publication of the Final Rule in the Federal Register), employers may not have any worker sign a new non-compete, even senior executives.
The NPRM would have provided a limited exception to the non-compete ban in the sale-of-a-business context, but only where the seller owned at least a 25% stake in the business being sold. The Final Rule removes that 25% requirement, and instead allows for non-competes to be entered in the “bona fide” sale of a business or of a person’s ownership interest in a business. This is an improvement, because there are many owners with significant goodwill who own less than a 25% stake in their business.
Are Employers Required to Rescind Non-Competes?
No, but they still must give notice to workers who are not “senior executives” that their non-compete provisions are unenforceable. The Final Rule provides a model notice and a safe harbor for employers who distribute the model notice.
How Does the Final Rule Affect Other Restrictive Covenants?
The Final Rule has a new definition of “non-compete clause,” which is a term or condition of employment that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting employment with another or operating a business.
But the Final Rule, like the NPRM, does not explicitly invalidate other covenants, such as non-solicitation, non-servicing, non-recruitment, and non-disclosure clauses. Any challenge to such covenants would need to be evaluated on a case-by-case basis. If the Final Rule survives, this gray area will certainly provide fertile ground for litigation.
When Does the Final Rule Take Effect?
The Final Rule will take effect 120 days after publication in the Federal Register.
Will the Final Rule Be Challenged in Court?
Yes. A company sued the FTC literally hours after the final vote. Read the full Complaint here. In addition to challenging the Final Rule itself, the plaintiff also seeks a declaration that the “FTC is unconstitutionally structured in violation of Article II because its Commissioners are improperly insulated from presidential removal.”
The U.S. Chamber of Commerce said that it plans to sue the FTC as soon as tomorrow, Wednesday, April 24, 2024.
As Commissioners Ferguson and Holyoak explained during the Open Commission Meeting, there are several legal bases on which courts could decide the FTC lacks the authority to ban non-compete agreements in the manner provided by the Final Rule. Challengers will likely move for a nationwide injunction stopping the Final Rule from taking effect while litigation is pending. Ultimately, the Final Rule’s legality will probably go before the Supreme Court of the United States.
We will continue to monitor the ensuing litigation and keep you at the forefront of any developments.
Increase in FLSA Salary Thresholds Impacts MA, RI Non-Compete Law
The U.S. Department of Labor issued a final rule increasing the salary thresholds for exemptions under the Fair Labor Standards Act.
Currently, the salary threshold for the administrative, executive, and professional exemptions is $684 per week (or $35,568 annually). The DOL’s new rule raises the EAP exemption threshold first to $844 per week ($43,888 annually) as of July 1, 2024, then to $1,128 per week (or $58,656 annually) effective January 1, 2025. The threshold for the “highly compensated employee" exemption will rise, first to $132,964 on July 1, then to $151,164 on January 1, 2025.
This is huge news for employers generally, but there is special relevance in the non-compete world.
Massachusetts and Rhode Island prohibit the use of non-compete agreements with employees who are nonexempt under the FLSA. Employers in those states will need to ensure compliance with the updated salary thresholds for the applicable FLSA exemptions.
As with the FTC, we will monitor any legal challenges to the rule.
