Non-Compete Agreements Would be Abolished Under New FTC Rule

New Jersey employment law has generally upheld non-compete (or non-competition) agreements provided they met certain requirements aimed at allowing employees to earn a living.  Non-compete agreements have been much vilified by pro-employee groups, and much supported by pro-employer groups.  However, the United States Federal Trade Commission has issued a rule which would prohibit non-compete agreements.  At least one lawsuit has been filed aiming to block the new regulation, and others are expected.  So whether the rule will take effect, and if so in what form it will be allowed, is still an open question.  However, employers and employees should be prepared, because unless an injunction is issued the rule will become effective in several months.

 

The Rule

The Rule, part of the United States Code of Federal Regulations, defines non-compete clauses as:

(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i) 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

(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

(2) For the purposes of this [rule], term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

The Rule declares non-compete clauses to be a prohibited method of unfair competition, and effectively bars them, except that employers may continue to enforce existing non-compete agreements with senior executives.

The meat of the rule is section 910.2 of the Code of Federal Regulations.  It provides:

(a) Unfair methods of competition—(1) Workers other than senior executives. With respect to a worker other than a senior executive, it is an unfair method of competition for a person:

(i) To enter into or attempt to enter into a non-compete clause;

(ii) To enforce or attempt to enforce a non-compete clause; or

(iii) To represent that the worker is subject to a non-compete clause.

(2) Senior executives. With respect to a senior executive, it is an unfair method of competition for a person:

(i) To enter into or attempt to enter into a non-compete clause;

(ii) To enforce or attempt to enforce a non-compete clause entered into after the effective date; or

(iii) To represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.

The Rule defines “senior executives.”

Senior executive means a worker who:

(1) Was in a policy-making position; and

(2) Received from a person for the employment:

(i) Total annual compensation of at least $151,164 in the preceding year; or

(ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or

(iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.

 

Effective Date

The Rule becomes effective 120 days after it is published in the Federal Register.  (The Federal Register website states that it is scheduled to be published on May 7, 2024, but has not been published yet.) However, the United States Chamber of Commerce has sued in Federal Court in Texas to block implementation of the rule.  It is possible that the litigation may make it all the way to the United States Supreme Court.  Thus, when the rule will actually take effect is up in the air, but employers should plan to be ready for implementation within the 120 day window if an injunction is not granted.

 

Notice Requirements

Employers are required to give their employees notice of the rule and that, as specified by the rule, their non-compete agreements will not be enforced.

 

Exceptions

As noted above, non-compete agreements already entered into with senior executives may continue to be enforced, but new ones may not be entered into.  Non-compete agreements included in agreements for the sale of all or substantially all of a person’s ownership interest in a business will remain enforceable.  Likewise, parties may seek relief in court for violations of non-compete agreements which occurred prior to the effective date of the rule.

 

New Jersey Employment Law Superseded

To the extent that State law conflicts, it is superseded by the FTC’s rule under the Supremacy Clause of the United States Constitution, and the language of the rule itself.  Thus, New Jersey employment law concerning the enforcement of non-compete clauses will apply only for existing senior executive non-compete agreements, non-compete agreements in the sales of business, and litigation over pre-rule breaches of non-compete agreements.

 

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