The FTC finalized a rule (89 FR 38342) that would ban the use of most noncompete clauses, effective Sept. 4, on a 3-2 vote.
The final rule is controversial. The U.S. Chamber of Commerce, Business Roundtable, and other state-level business advocacy groups have sued to stop it, arguing that new law, rather than regulation, is required to ban the practice.
If it withstands a legal challenge, the final rule would make most noncompete clauses unenforceable 120 days after publication; that effective date would currently be Sept. 4, 2024. The rule would affect clauses entered into before that date, with a notable exception for existing non-competes with senior executives. Under the final rule, a senior executive is defined as a worker in a policy-making position who also received total annual compensation of at least $151,164 in the preceding year.
The final rule also requires employers to notify workers, other than excepted senior executives, with existing non-competes that the agreements are no longer enforceable on or after Sept. 4, 2024. To facilitate compliance and minimize burdens, the final rule includes model language that would satisfy this new notice requirement.
The final rule defines noncompete clauses broadly to include 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.
The final rule also clarifies that a term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
The final rule also defines the term “worker” broadly to mean a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal law, including but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.
In addition, there is a narrow exception for certain “bona fide sales of business” — the final rule generally does not apply to a noncompete clause entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
Not all industries or employers are affected by the rule, as some, like banking and some nonprofits, do not fall under the FTC’s jurisdiction, though the extent to which the rule applies to nonprofits, appears uncertain.
The FTC applies a two-part test to determine whether a corporation is organized for profit and thus within the FTC’s jurisdiction — the not-for-profit jurisdictional exception requires both (i) that there be an adequate nexus between an organization’s activities and its alleged public purposes and (ii) that its net proceeds be properly devoted to recognized public, rather than private, interests. The FTC noted that judicial decisions and FTC precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the FTC’s jurisdiction.
Grant Thornton Insight:
Although the regulation is not promulgated by Treasury and does not directly affect any tax rules, it could have important implications for employee and worker relationships and compensation and benefit plans.
Contacts:
Content disclaimer
This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
For additional information on topics covered in this content, contact a Grant Thornton professional.
Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and Grant Thornton Advisors LLC and its subsidiary entities provide tax and business consulting services to their clients. Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.
Share with your network
Share