One exception to these rules is that employers will be able to continue to enforce non-compete clauses with “senior executives” that were entered into prior to the effective date of the FTC final rule (but cannot enter into new non-compete clauses with “senior executives” following the effective date of the FTC final rule).  

“Senior executive” is narrowly defined and means a worker who is both in a “policy-making position” and has a total annual compensation of at least $151,164.  “Policy-making position” means a business entity’s president, CEO or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority of the business entity similar to an officer with policy-making authority.  “Policy-making authority” means final authority to make policy decisions that control significant aspects of a business entity or common enterprise, but does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or affiliate of a common enterprise.

Fewer than 1% of workers are estimated to be senior executives under the final rule and this will likely only pick up the C-suite.

The FTC final rule, by its terms, is scheduled to go into effect 120 days after it is published in the federal register (which date of publication can vary) – but it is anticipated that the effective date of the FTC final rule will be sometime in August/September.

That being said, legal challenges to the FTC’s final rule have already commenced – including a federal lawsuit by the US Chamber of Commerce.  If a preliminary injunction is granted by a court as part of these legal challenges, that could extend the effective date of the FTC final rule.

Prior to the effective date of the FTC final rule, employers are permitted to enter into (and enforce) non-compete clauses with their workers, subject to the normal state law considerations.  However, assuming that the FTC final rule survives legal challenges, once it becomes effective, non-compete clauses would no longer be permitted to be included in agreements for workers (in so far as they restrict work or operating a business inside of the U.S.) and employers would also not be able to enforce such non-compete clauses including those previously entered into (other than those with grandfathered “senior executives”) – and the FTC final rule requires employers to provide written notification to workers prior to the effective date of the FTC final rule that any non-compete clauses will not, and cannot legally be, enforced.

The FTC final rule does not categorically prohibit other types of restrictive covenants, such as post-employment non-solicitation covenants, but does prohibit contractual terms that function as “de facto” or “functional” non-competes that prohibit a worker from seeking or accepting employment or operating a business after the conclusion of the worker’s employment.  In its comments to the final rule, the FTC stated that contractual language that is so broad or onerous such that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting post-employment work would constitute a non-compete clause under the final rule.  Whether or not a non-solicitation clause will be considered a “de facto” non-compete will likely be a fact-specific inquiry that is tested by the courts.

As to jurisdiction, the FTC declined to add language in the final rule stating that it does not apply to overseas employers, and in its rulemaking commentary the FTC stated that “the final rule may apply to overseas employers if the non-compete purports to restrict work or starting a business in the U.S. and the reviewing court applies U.S. law.”  So, it seems that the FTC may at least take the view that its rule also applies to overseas employers with US connections -- but it is uncertain how this may play out at this stage.

The FTC estimates that banning non-competes will result in:

• Reduced health care costs: $74-$194 billion in reduced spending on physician services over the next decade.
• New business formation: 2.7% increase in the rate of new firm formation, resulting in over 8,500 additional new businesses created each year.
• Rise in innovation: an average of 17,000-29,000 more patents each year for the next ten years.
  • This reflects an estimated increase of about 3,000 to 5,000 new patents in the first year non-competes are banned, rising to about 30,000-53,000 in the tenth year.
  • This represents an estimated increase of 11-19% annually over a ten-year period.
• Higher worker earnings: $400-$488 billion in increased wages for workers over the next decade.
  • The average worker’s earnings will rise an estimated extra $524 per year.

The UK government has had enforceability of non-compete clauses in its sights for many years. As far back as May 2016 the Dept for Business Innovation and Skills published a Call for Evidence document "to explore whether non-compete clauses can unfairly hinder workers from moving freely between employers, and from developing innovative ideas, translating those ideas into a start-up, and growing their business". More recently, the UK Government has announced its intention to limit the length of time that a non-compete clause can lawfully apply to 3 months for employment contracts and worker contracts. As yet, that legislation has not been forthcoming. No doubt the UK Government will be watching the US position with interest, and although the current UK government has shelved plans to abolish non-competes, it is likely we may see legislation to limit the length of time they may apply.