Julia Cantu and Justin Marti of Marti Law Group provide insight on the nationwide ban on new non-competes for all workers.
Earlier this year, the Federal Trade Commission (FTC) made a pivotal announcement, instituting a nationwide ban on new non-competes for all workers, encompassing both 1099 independent contractors and W-2 employees. The controversial ban has been met with both support and criticism. Supporters of the ban believe non-competes are overly restrictive for employees, can stifle wages, increase healthcare costs, and undermine competition. Challengers of the FTC’s ban claim the FTC does not have the authority to implement the rule and it is an overreach of its delegated authority. In this article, we break down what practice and spa owners need to know about the new FTC Non-Compete Clause Rule, including a timeline, key definitions, and implications.
Timeline for the FTC Non-Compete Clause Rule and Legal Challenges
On April 23, 2024, the FTC announced its ban on non-competes with the Non-Compete Clause Rule, encompassing both 1099 independent contractors and W-2 employees. The final rule was published in the Federal Register on May 7, 2024 (89 Fed. Reg. 38342), and was scheduled to become effective on September 4, 2024, if not delayed or derailed by legal challenges.
However, in July of this year, a federal judge in Texas issued a preliminary order against the ban that can delay it from taking effect in September. The injunction came just days after the Supreme Court's overruling of the Chevron decision, which has given judges more power to challenge federal agencies' rulemaking authority.
As for now, the fate of the FTC's noncompete ban is unclear. The estimated 1 in 5 Americans who are subject to non-competes, as well as employers, should continue to stay informed as the legal challenges to the ban play out.
Now that we’ve broken down the timeline, let’s dive into non-competes and what they mean for employees and spa owners alike.
What is a non-compete clause?
The term “non-compete” encompasses more than the traditional employment non-competition clause. The definition from the FTC’s Non-Compete Clause Rule states that a non-compete:
…encompasses any term or condition of employment that prohibits or penalizes a worker from seeking or accepting work with a different entity or operating a business in the United States after the conclusion of their employment. This includes contractual terms, workplace policies, or any other agreements, whether written or oral.
Not only does the FTC’s rule apply to future non-competition agreements, but it works retroactively, rendering existing non-competes unenforceable (there is an exception for narrowly defined “senior executives”).
How is a non-compete different from non-solicitation?
As noted above, non-competition clauses are intended to prevent workers from practicing their trade at another (competing) business. This is an important distinction from non-solicitation. Non-solicitation applies to situations where an employee directly solicits clients or fellow employees of the former employer. Unfortunately, some exiting employees will download or print an entire client list and begin contacting those individuals to solicit their business. Language in employment and contractor agreements prohibiting this activity will remain enforceable. In the eyes of the law, it is one thing to practice a trade in which a worker has likely invested significant time and money to learn, however it is another to intentionally target the business of a former employer.
If enacted, how would this new rule affect existing non-competes?
The new rule will render all existing non-competes between employers and their workers unenforceable, with the aforementioned narrow exception for existing senior executives meeting specific criteria. Going forward, senior executives would not be subject to non-competes. Note that the rule does not affect non-competes entered into by a seller pursuant to the sale of a business or practice.
Are employers required to notify workers who are currently under non-competes of the change in this rule?
Yes! Employers will need to communicate to workers with existing non-competes that if the ban moves forward, they would no longer be enforceable after September 4, 2024 (or at the time the ban is enforced should that date change). The FTC provides model language for this notification, but consulting with legal counsel is advisable to ensure compliance.
Have non-competes always been controversial?
Employers have traditionally relied on non-competes to safeguard their investments in employee training and development. Recent years have seen a significant pushback against non-competes in the U.S., with lawmakers enacting bans for workers under 18 years old, those below a certain income threshold, and certain professions where non-competes could exacerbate labor shortages (such as in the healthcare industry). In addition, some states, such as California, have already worked to ban non-competes in the employment setting.
While non-competes may have been popular in the past for injectors or providers whose patients may follow them to another practice, this rule (should it go into effect) will put an outright ban on what was already difficult to enforce.
What will happen in states that already restrict non-competes?
The new rule does not limit or affect enforcement of state laws that restrict non-competes where the state laws do not conflict with the rule. For states like California that already have non-compete bans in place, the new FTC rule does not affect existing regulation. While California banned non-competes in 2023, employers should still seek legal guidance to navigate any differences in compliance requirements between state and federal regulations.
How can practice owners prepare for this rule?
To prepare for the forthcoming Non-Compete Clause Rule, employers need to take proactive steps:
- Stay Informed: Keep up with developments regarding the rule's enactment process and legal challenges. Stay informed about state-specific regulations, especially if operating in jurisdictions with existing and more comprehensive non-compete bans.
- Review and Update Existing Employee Contracts, Policies and Procedures: Assess all current employment agreements, handbooks, and policies for any non-compete language. Identify agreements that may need to be revised or terminated in light of the new rule.
- Identify and Notify Affected Workers: Determine which employees are currently bound by non-compete agreements and prepare to notify them of the upcoming changes.
- Consult Legal Counsel: Seek guidance from legal experts to ensure compliance with the new rule.
By taking these proactive measures, employers can effectively navigate the pending transition brought about by the Non-Compete Clause Rule and ensure compliance. For more guidance or information on this issue, visit www.martilawgroup.com.