Mark Pestronk
Q: Did the Federal Trade Commission (FTC) ever adopt its proposed rule banning noncompetes, which you covered in a February 2023 Legal Briefs column ("Noncompete clauses could be going away")? If so, how does it apply to the travel agency business? Does it supersede my state's law, which allows noncompetes? Does it apply to independent contractors as well as employees? Does it also ban nonsolicitation clauses?
A: With little publicity, the FTC adopted the rule last month. It goes into effect on Sept. 4, and it will have a profound effect on businesses in the U.S.
For travel agencies, it means that you can no longer have clauses in employment or host-IC agreements (or policies) that prohibit an employee or IC from working with a competitor of the agency after the employment or IC relationship terminates. The rule does not prohibit noncompete clauses that apply during employment or during the host-IC relationship.
The FTC rule supersedes all state laws that allow noncompete clauses, even limited ones that allow such clauses if they are limited in time and geography.
The rule defines a noncompete clause very broadly: It is "a term or condition ... that functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment ...."
The words "worker" and "employment" are defined to include ICs and host-IC relationships: "A worker is 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 ... 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."
The term "functions to prevent" clarifies that "if an employer adopts a term or condition that is so broad or onerous that it has the same functional effect as a term or condition prohibiting ... other work or starting a business after their employment ends, such a term is a noncompete clause under the final rule." So even nonsolicitation or noninterference clauses can be deemed illegal noncompetes clauses, depending on the effect they have on the worker's ability to work in their chosen industry.
Obviously, what is a clause that has the "same functional effect" as a noncompete is very vague and depends on the facts of each case. Employment law experts are probably going to advise that you shouldn't even have any nonsolicitation clauses or the like, in order to avoid expensive litigation.
There are two exceptions to the rule: It does not apply to "senior executives" making more than $151,164, and it does not prohibit buyers of businesses from requiring the seller agree to a noncompete as part of the sale.
There is already a suit in Texas federal court to stop the rule from going into effect, and it probably has a good chance of success.