On April 23, 2024, the Federal Trade Commission (FTC) announced its final Noncompete Clause Rule (final rule) banning post-employment noncompete clauses between employers and their workers. The final rule was published in the Federal Register and the effective date is set to be Sept. 4, 2024. The final rule prohibits an employer from entering into, or attempting to enter into, a noncompete clause with a "worker" (including, e.g., employees and independent contractors) or representing that a worker is subject to a noncompete clause.
The FTC does not have jurisdiction over all industries; therefore, certain industries are exempt from the final rule. The final rule also does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyard Act. Additionally, the FTC does not have jurisdiction over nonprofits. Other exemptions include i) existing noncompetes with "senior executives" (those with over $151,164 in annual compensation and in a policy-making position for the business; ii) noncompetes entered in connection with the bona fide sale of a business, and iii) noncompetes enforced where the cause of action accrued prior to the final rule's effective date.
However, states have already challenged the FTC's power to enact the new rule. A lawsuit has been filed by Ryan, LLC in the U.S. District Court for the Northern District of Texas. The lawsuit claims that the FTC doesn't have the authority to issue the rule and that it is unconstitutional. This case is scheduled to be heard on or before Aug. 30, 2024, prior to the effective date of the new rule. Even if the new rule is found to be unenforceable, a clear message is being sent against the use of noncompete provisions. States are free to and may begin to enact laws that are similar to those that California has already adopted and implemented.
How the FTC's ban on noncompete clauses intersects with California's existing laws
It is important to note that the final rule preempts California law only where it conflicts with the final rule. Fortunately, or unfortunately (depending on your point of view), California's noncompete law is already more restrictive than the final rule. In fact, California has long prohibited noncompete agreements and California Business and Professions Code 16600 states as follows: "Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." California's provision does not include an exemption for senior executives. Like the final rule, California has and continues to exempt noncompetes entered in connection with a bona fide sale of a business.
How the ban is impacting enforcement of noncompete agreements already in place
Because California essentially only allows a noncompete provision in connection with a bona fide sale of a business, the new federal law will have little impact on California businesses doing only business in the state of California. Multi-state companies will need to address how to uncouple the agreements in states that they may use noncompetes, compared to those states that already have a ban. Again, California businesses need to recognize that our law is already more prohibitive than the new final rule.
Compliance measures California businesses should take to align with the new regulations
All businesses, including California businesses, must review their employment contracts to ensure that it does not contain a provision in conflict with the final rule and/or California Business and Professions Code 16600.
Not only does the final rule prohibit noncompete clauses, but the new rule also requires an employer to provide clear and conspicuous notice to workers subject to a prohibited noncompete, in an individualized communication that the worker's noncompete clause will not be and cannot be enforced against the worker. The notice must be provided by Sept. 4, 2024, by hand delivery, mail at the worker's last known street address, by email or by text message. In some regards, California beat the FTC to the punch.
By way of SB 699 and AB 1076, California now requires that employers similarly provide individualized, written notice to current and former employees (who were employed at any time after Jan. 1, 2022, and have signed agreements containing noncompete clauses by Feb. 14, 2024). The notices must be delivered to the last known address and the email address of the employee or former employee. Any employer who fails to comply may be subject to a penalty of $2,500 per violation. If an employer has not issued the required notices under California law, such are urged to do so immediately to ensure notices satisfy the requirements of the new rule and California law.
How the FTC's ban on noncompete clauses affect California businesses' hiring practices
Since California already had a prohibition against noncompete clauses, no direct impact is likely. However, the indirect impact of banning of noncompetes across all states may have an interesting, indirect impact on the availability of talent. The ban on noncompete clauses is intended to allow workers freedom of mobility. California again may have another factor to consider in keeping talent from leaving the state of California as offers from other states will no longer have the limitation of a noncompete provision.
Impact of the new rule and noncompete provisions
On its face, the new rule applies to noncompete provisions. However, the final rule has the potential to impact nondisclosure provisions, ERISA-covered employee benefit plans, deferred compensation plans and other similar agreements. Employers should carefully review their employee-related agreements to ensure that no provision violates the new rule or California law. Businesses with headquarters and/or HR departments in other states should take extra care to determine that their California agreements are in compliance.
Anticipated long-term effects of the ban on California's business environment
California has long been an advocate for worker mobility, albeit in the state of California, from a talent pool perspective, workers will have more freedom to leave states such as California. And in regard to enforcement of bans against noncompete clauses, California had already paved the way to a time when there will be no noncompete clauses outside the scope of a sale of a business.
Originally published in the Sacramento Business Journal
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