A Federal Trade Commission panel voted 3-2 in April to ban most noncompete agreements between employers and workers. The Noncompete Clause Rule could go into effect in August, but the U.S. Chamber of Commerce and other business groups filed suit in opposition. The lawsuit, which is pending, alleges that the FTC lacks the authority to impose the rule. The Chamber of Commerce called the rule “unlawful” and said it “sets a dangerous precedent for government micromanagement of business.”
Q: What does the rule prohibit?
A: The rule prohibits any “contractual term between an employer and a worker that prevents 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.” The rule utilizes a broad definition of “worker” to include any person who works, whether paid or unpaid, for an employer. This includes, but is not limited to, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a client or customer.
Q: When does the rule take effect?
A: The rule takes effect 120 days from its publication in the Federal Register. Prior to the rule’s effective date, employers will have to provide current and former employees subject to noncompete agreements with written notice that the noncomplete cannot be enforced against the employee.
Q: Does the rule apply to existing noncompete agreements?
A: All noncompetition agreements between an employer and a worker shall be void and unenforceable 120 days following the publication of the final rule, with the exception of existing agreements with senior executives. Under the rule, senior executives must earn at least $151,164 per year (including salary, bonus and commissions) and must be in a “policymaking position.”
Q: What is the definition of “noncompete” under the rule?
A; The definition of noncompete under the rule is a clause that “penalizes a worker” or “functions to prevent a worker” from “seeking or accepting work” or “operating a business.”
Q: Are nonsolicitation agreements covered under the rule?
A: Depending on the facts at issue and the specific language of the provision at issue, nonsolicitation agreements may be covered under the rule if they are overly broad as to “function to prevent” a worker from competing.
Q: Are nondisclosures agreements covered under the rule?
A: The FTC has stated that an NDA may be covered under the rule if it spans such a large scope of information that it functions to prevent workers from seeking or accepting other work or starting a business after they leave their job.
Q: Are there exceptions to the rule?
A: The rule does not apply to noncompete agreements that are ancillary to a sale of business.
Q: Can outside activities be restricted during employment?
A: Yes. Exclusivity provisions, outside activity restrictions or other noncompetition restrictions during the term of a worker’s employment, such as prohibitions on moonlighting for other organizations while a current employee, are not prohibited.