By Patrick O’Brien, JD, General Counsel, American Med Spa Association (AmSpa)

This week, the U.S. Federal Trade Commission (FTC) voted 3-2 to approve a final rule that would prohibit non-compete clauses in nearly all employment situations. AmSpa covered the proposed rule when it was introduced last year, and the final rule shares many similarities with the proposed rule. But how might this impact your aesthetic practice?

First of all, does this FTC vote mean that non-competes are now gone? No, not yet: This rule becomes effective 120 days after it has been published in the federal register. Even then, there are likely to be multiple legal challenges to the rule that may block or delay the implementation.

Does this mean you don’t need to do anything? Also no: Non-compete clauses nationally are becoming less and less popular, many states have greatly narrowed what types of restrictions they will allow, and a few states have largely banned the practice, including Colorado and Illinois. So, you should still have a plan and review your existing employment agreements for if or when non-competes become prohibited in your state.

Let’s look at what the final rule says. As with the earlier proposed rule, the final rule makes it an “unfair method of competition” to:

1. Enter or attempt to enter a non-compete clause;
2. Enforce or attempt to enforce a non-compete; or
3. Represent to a worker that they are subject to a non-compete.

This applies to all workers except for “senior executives,” which we will discuss below. Workers can be paid or unpaid and include employees, independent contractors, interns, volunteers or sole proprietors who provide a service. The franchisee-franchisor relationship is specifically excluded from this definition. A “non-compete clause” is defined very broadly to include a term or condition that prohibits or penalizes a worker from seeking or accepting other employment or operating a business after the term of employment in the US.

Similar to the above, once the rule goes into effect, it would also be an unfair method of competition to:

1. Enter or attempt to enter a non-compete clause;
2. Enforce or attempt to enforce a non-compete; or
3. Represent that “senior executives” are subject to a non-compete.

However, there is a specific carve-out for existing non-competes with senior executives: those entered into prior to the rule’s effective date would still be enforceable. As with workers above, though, any new non-competes entered into after the rule’s effective date would be prohibited. In this instance, “senior executive” means someone who is in a policymaking position and was paid total compensation at the rate of at least $151,164 per year the preceding year. “Policymaking” is broadly defined to include anyone with the authority to control significant aspects of a business and may include any officer or position, including a president and CEO. This carve-out is likely a result of comments the FTC received about the need to protect a business’s intellectual property and trade secrets, and the non-compete provisions likely played a significant role in setting these executives’ compensation.

The final rule also includes a limited number of exceptions to this general prohibition. It still allows existing causes of action that occurred prior to the effective date, so if an employee breaches a non-compete before the rule is in effect, the business can still enforce it, even after the rule becomes effective. There is a good-faith exception where contractual provisions can be enforced if the person has a good-faith belief that they fall under this rule. And the largest exemption is for the sale of a business—a person who sells all or substantially all of their business interest can still be restricted by non-compete clauses as part of the sale. This rule also exempts anyone from existing state law. So, if a provision is, for one reason or another, not covered by this rule, the person must still comply with the rules for their state.

Once the rule becomes effective, employers will have an affirmative responsibility to give notice to their employees, both current and former, that any existing non-competes are no longer enforceable. Notice can be delivered by hand, in mail or by email. The rule includes model language for this notice and allows for it to be delivered in numerous translated languages if appropriate.

Do you need to make changes now? No, but you should probably take some action. As covered above, this rule will take effect 120 days after it is published in the federal register. At the time of this article, the rule has not yet been published. However, the federal register is published daily Monday through Friday, so there may not be a significant delay between now and when the 120-day clock starts. Also, as we discussed above and in prior articles, controversial rules such as this are always subject to litigation. Often, these suits can delay or alter the final adoption of rules, but, of course, there is no guarantee this will happen. So, there will be at least a few months before anything officially changes.

What you can do now as an employer is review the following with your legal and business advisors:

• Review what employment provisions you currently use and how they may be affected;
• Discuss alternatives;
• Develop a plan to protect your trade secrets and intellectual property without using non-competes; and
• Review state law to see if you are currently in compliance.

For new rules like this, information can change frequently. You will want to follow up with your advisors to stay current, and keep watching AmSpa’s legal compliance coverage to view the latest updates as they develop.