On, Tuesday, April 23, 2024, the Federal Trade Commission enacted a new rule, similar to California preexisting laws, prohibiting non-compete clauses. The new rule provides that it is an unfair method of competition for a person to enter into, or attempt to enter into, a non-compete clause, to enforce or attempt to enforce a non-compete clause, or to represent that the worker is subject to a non-compete clause. The final rule defines “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.” The final rule is set to become effective on September 4, 2024.
For existing non-competition provisions, the rule allows non-compete clauses with “senior executives” to remain in force while non-complete clauses in contracts with all “other workers” will be prohibited. Newly negotiated non-compete clauses with senior executives will similarly not be enforceable. The rule defines “senior executives” to be workers earning more than $151,164 annually, who are in a “policy-making position” with the company. Notably, there is an exception to the new rule for non-compete clauses entered into in connection with certain bona fide business sales.
While this new federal rule has sent shock waves across the country, a ban on non-compete clauses is not new for employers in California. California has long prohibited non-competition clauses under California Business and Professions Code § 16600, which prohibits, subject to narrow exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” The new federal non-compete rule specifically provides that states “may continue to enforce laws that restrict non-competes and do not conflict with the Final Rule, even if the scope of the State restrictions is narrower than the Final Rule.”
For example, among other differences, California law does not have an exception for permitting continued enforcement of existing non-compete clauses with senior executives as described in the federal rule. Additionally, California recently doubled down on its non-compete prohibition by amending §16600 to expand the scope of, and the consequences for violating, these restrictions. As such, California employers must still comply with the more restrictive California laws.
As for employers in states that permitted non-compete clauses prior to the federal rule being published, the U.S. Chamber of Commerce, and others, have already filed a lawsuit in a federal district court in Texas seeking to invalidate and enjoin enforcement of the federal rule, and other lawsuits are expected. It is anticipated that the court will issue its ruling on the motion to stay enforcement of the federal rule by early July 2024.
Ferruzzo attorneys are here to counsel and advise on employment matters, generally, and the new federal rule, specifically.
Note: This article is not meant to provide specific legal advice. For further advice, please contact any of the attorneys in our Employment and Civil Litigation Practice Group who are ready to assist you.
Counsel in the firm's Employment & Civil Litigation Group