FTC Bans Non-Competes Nationwide: Part 2 - Employees

FTC Bans Non-Competes Nationwise: Part 1 - The Rule Recap

In our last article we covered the FTC’s final rule and when it goes into effect, as well as what a non-compete is. In this article we will cover which employees the FTC’s final rule covers

Which Employees Does the Final Rule Affect?

The FTC splits employees into two categories; senior executives and non-senior executives. A senior executive refers to workers who are in a “policy-making position” and who received from their employer: (1) total annual compensation of at least $151,164 in the preceding year; or (2) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (3) 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. Total compensation may include salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during that 52-week period. Nondiscretionary bonuses and compensation includes compensation paid pursuant to any prior contract, agreement, or promise, including performance bonuses the terms of which the worker knows and can expect. Total annual compensation does not include board, lodging and other facilities as defined in 29 CFR 541.606, and does not include payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other similar fringe benefits.

The FTC defines “preceding year” as a person’s choice among the following time periods: (a) the most recent 52-week year; (b) the most recent calendar year, (c) the most recent fiscal year, or (d) the most recent anniversary of hire year.

“Policy-making position” is defined as 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 for the business entity. The definition of “policy-making position” further states that an officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for the business entity. Finally, the definition of “policy-making position” states that a natural person who does not have policymaking authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.

Further, “officer” is defined as a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any natural person routinely performing corresponding functions with respect to any business entity whether incorporated or unincorporated. The definition also includes workers in equivalent roles.

The Final Rule defines “policy-making authority” as final authority to make policy decisions that control significant aspects of a business entity or a common enterprise. Further, policy-making authority 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 of or affiliate of a common enterprise.

Accordingly, for a worker to be a senior executive, in addition to meeting the compensation threshold, the worker must be at the level of a president, CEO or the equivalent, officer, or in a position that has similar authority to a president or officer. Presidents, CEOs, and their equivalents are presumed to be senior executives (i.e., employers do not need to consider the further element of “policy-making authority”). The definition of “policy-making position” includes workers with equivalent authority because job titles and specific duties may vary between companies. This ensures that the term “senior executive” is broad enough to cover more than just a president or CEO.

In order to ensure that lower-level workers, whom the FTC finds likely experience exploitation and coercion, are not included in the definition of senior executive, policy-making authority is assessed based on the business as a whole, not a particular office, department, or other sublevel. For example, if the head of a marketing division in a manufacturing firm only makes policy decisions for the marketing division, and those decisions do not control significant aspects of the business, that worker would not be considered a senior executive. Similarly, in the medical context, neither the head of a hospital’s surgery practice nor a physician who runs an internal medical practice that is part of a hospital system would be senior executives, assuming they are decision-makers only for their particular division.

To be considered a “common enterprise” for the purposes of defining policy-making authority and policy-making position, the FTC looks beyond legal corporate entities to whether there is a common enterprise of “integrated business entities.” This means that the various components of the common enterprise have one or more of the following characteristics: maintain officers, directors, and workers in common; operate under common control; share offices; commingle funds; and share advertising and marketing. Therefore, the definitions of policy-making authority and policy-making position include provisions whose purpose is to exclude those executives of a subsidiary or affiliate of a common enterprise from being considered senior executives. For example, if a business operates in several States and its operations in each State are organized as their own corporation, assuming these businesses and the parent company meet the criteria for a common enterprise, the head of each State corporation would not be a senior executive. Rather, only the senior executives of the parent company (or whichever company is making policy decisions for the common enterprise) could qualify as senior executives for purposes of this final rule, because they are the workers with the highest level of authority in the organization and most likely to have bargaining power and a bespoke, negotiated agreement. However, a worker could qualify as a senior executive even if they were an executive of one or more subsidiaries or affiliates of the common enterprise, so long as that senior executive exercised policy-making authority over the common enterprise in its entirety. This exclusion from the definitions of “policy-making authority” and “policy-making position” applies only to common enterprises; for subsidiaries or affiliates that are not part of a common enterprise, a worker could qualify as a senior executive if they have policy-making authority over that subsidiary or affiliate and meet all of the requirements.

The final rule provides that, with respect to a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or 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.

Existing non-competes for senior executives remain in effect. The FTC found that this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes. However, employers cannot enter into new noncompetes with senior executives. For workers who are not senior executives, existing non-competes are no longer enforceable after the final rule’s effective date.

What Must Employers with Employees Under Existing Noncompetes do to Maintain Compliance?

For employees under existing noncompetes that are no longer enforceable, i.e., non-senior executive employees, the employers must provide notice to employees informing them that the employer will no longer enforce their noncompetes.

Employers must provide such workers with existing non-competes notice that they are no longer enforceable. To facilitate compliance and minimize burden, the final rule includes model language that satisfies this notice requirement.

Next Post

In our next post, we will cover Employees Exempt from the FTC’s Final Rule.