Navigating the FTC’s Ban on Non-Competes: What it Means for Businesses in Florida: Part II
By James M. Gonzalez, Brittany J. Mills May 3, 2024 Posted in Business Litigation Share
In Part 1 of this series, we introduced the final rule banning non-compete agreements announced by the Federal Trade Commission (FTC) on April 23, 2024. In Part 2, we will dive into what Florida employers can expect as a result of the non-compete ban and how they can prepare.
It’s important to note that we do not have the exact date that the rule will go into effect. However, we know that the rule will not be effective until 120 days after it is published in the Federal Register. This will give employers time to prepare for compliance.
The FTC announced the proposed rule on January 5, 2023. As part of the rule-making process, the public had the opportunity to submit comments. The final rule is a reflection of the changes incorporated as a result of those comments. Notably, and frequently pointed out by the FTC, a number of employers support the non-compete ban and suggested that non-compete agreements are not an effective way to reduce unfair competition and increase employee retention. Of course, employees largely supported the ban and offered stories of how a non-compete agreement damaged them financially.
Florida employers, accustomed to a state that favors restrictive covenants against employees to protect employers, will have to adapt their business practices to the new rule. This will include providing notice to employees with existing non-compete agreements and removing any non-compete language from future employee agreements. The following are the key takeaways for Florida employers to know about the FTC non-compete ban:
- When will the rule go into effect?
Although the FTC final rule banning competes was announced on April 24, 2024, the final rule will not go into effect until 120 days after it is published in the Federal Register. At this time, the FTC has not announced a publication date, but we expect the effective date of the Final Rule to be sometime in 2025 unless the final rule is enjoined.
- Are any types of employers exempt from the final rule?
Yes, any entities not under the FTC’s jurisdiction will not be subject to the final rule. This is good news for non-profit organizations because the FTC Act only reaches corporations that are “organized to carry on business for its own profit or that of its members.” Likewise, franchisor-franchisee relationships will not be subject to the rule.
- Who is considered a “worker” under the final rule?
The final rule broadly defines “worker” to include current and former workers and includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
- Are there any exceptions to the non-compete ban?
Yes, employers may continue to enforce non-compete agreements with employees who are considered “senior executives.” Under the final rule, “senior executive” is defined as workers earning more than $151,164 who are in a “policy-making position.” However, employers cannot enter into new non-compete for employees who would fall under the senior executive category.
Likewise, employers may enforce any cause of action related to a non-complete clause that accrues prior to the effective date of the final rule. This means that any employees with a non-compete agreement that violated the agreement prior to the effective date of the final rule can be sued even after the rule becomes effective, so long as the violation occurred before the effective date.
- Are employers required to provide notice to employees of the noncompete ban?
Yes, but the notice requirements are less extensive than what was required in the initial rule. Under the final rule, employers only need to provide written notice to non-senior executive employees that their noncompete agreements will no longer be enforceable. Notice must be provided before the effective date of the final rule. The final rule will contain model language for the employer’s notice.
- Does the final rule apply to de facto non-compete agreements?
Yes, the FTC will broadly interpret any term or condition of employment that may prevent or penalize a worker from leaving the job to seek other employment or start a business to be a non-compete agreement. The primary test of a de facto non-compete is whether the provision has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. For example, an agreement for a worker to pay the employer liquidated damages if the worker becomes employed with a competitor would be a de facto non-compete agreement and unenforceable under the final rule.
- How can Employers protect their business interests through employee agreements now?
The good news is that employers are not banned from all restrictive covenants and many restrictive covenants will not be considered a non-compete agreement unless the agreement is a de facto non-compete agreement as set forth in no. 6 above. The final rule generally does not affect employer’s non-disclosure agreements, customer non-solicitation agreements, or employee non-solicitation agreements. Further, the FTC specifically states that appropriately tailored non-disclosure agreements and training repayment assistance provisions that require the worker to repay training costs if employment is terminated within a specific time period would not be banned. Similarly, bonus repayment programs and tuition assistance repayment programs are expected to be acceptable under the final rule.
- Is there any way the final rule will not go into effect?
Yes, in fact, litigation is already ongoing with more lawsuits expected to come. Depending on the results of these lawsuits, it is entirely possible that the final rule will be changed again or enjoined altogether. In the event that a federal court enjoins the publishing of the final rule, we could be looking at more than a year of delay before the final rule is published, if it is published at all.
- What should employers do in the meantime?
Employers may continue under the status quo, but should keep in mind that any non-compete agreements entered into may be unenforceable at a future date. Some employers may wish to go ahead and rescind existing non-compete agreements and focus their employee agreement on other restrictive covenants aimed to protect proprietary business interest and trade secrets. In either case, it would be prudent for employers to maintain a list of employees (current and former), including whether an employee would be considered a “senior executive”, with non-compete agreements and their relevant contact information.
If you are an employer trying to navigate the FTC final rule banning non-competes and have questions or concerns regarding your rights and obligations, please do not hesitate to contact us to discuss further.