FTC Issues New Rules: What Does This Mean for Coach Contracts?
On April 23, 2024, the Federal Trade Commission (FTC) announced that it finalized the rules relating to non-compete clauses in employment contracts. A copy of the regulations can be found here.
NOTE: These rules go into effect 120 days from their issuance (Effective Date), making the Effective Date August 23, 2024. While there is time until these rules go into effect, coaches and clubs will familiarize themselves with these regulations.
WHAT DO THESE WORDS MEAN?
Before getting into the details of the rules, it is helpful to review some critical definitions.
NON-COMPETE CLAUSE
A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
A “term or condition” is a contractual term or a workplace policy.
(i) seeking or accepting work in the United States with a different person; or
A “person” means any person, partnership, corporation, association, or other legal entity. Essentially, any Business Entity (see below).
(ii) operating a business in the U.S. after the conclusion of the employment that includes the term or condition.
NOTES: This is a broad definition. The comments elaborate on this definition.
First, the FTC explains in its comments that a Non-Compete that “prohibits” is one that expressly prohibits. In other words, it is a term or policy that expressly states that the individual is restricted from seeking or accepting work or operating a business at the conclusion of employment.
Second, even if the term does not expressly prohibit, some terms can still be deemed a non-compete. According to the FTC a term that “functions to prohibit” a worker from seeking or accepting employment is one that “restrains such a large scope of activity that they function to prevent the worker from seeking or accepting other work.” In other words, if a term restricts an employees’ activity (actions, communications, travel) to seek subsequent employment, this could be a non-compete even though it does not not outright prohibit such activity.
Third, the FTC states that this definition does not include non-solicits. So, those non-solicitation requirements are still enforceable.
Prudent executives will consult with counsel to evaluate whether a term of the contract is in fact a “non-compete” as defined by these regulations. Most likely, we will see litigation over whether a term is a “non-compete” and thereby covered by the ban or a “non-solicitation” and not covered.
SENIOR EXECUTIVE vs. NON-SENIOR EXECUTIVE
As discussed below, the restrictions on non-competes are divided into two parts. The first section applies to individuals who are “Non-Senior Executives” and the second section applies to individuals who are “Senior Executives.”
SENIOR EXECUTIVE: This is an individual who:
Was in a policy making position; and
NOTE: “Policy Making Position” is a President, CEO, or equivalent, or any other officer of a business entity who has policy-making authority.
NOTE: “Policy Making Authority is the final authority to make decisions that control significant aspects of a business.
Received from a person for the employment:
Total Annual Compensation of at least $151,164 in the preceding year;
NOTE: “Total Annual Compensation” may include (1) salary, (2) commissions, (3) nondiscretionary bonus, (4) nondiscretionary compensation during the 52 week annual period.
Total compensation of at least $151,164 when annualized if the worker was employed during only part of the Preceding Year; or
NOTE: “Preceding Year” can be either: (1) 52-week year, (2) the most recent calendar year, (3) the most recent fiscal year, (4) the most recent anniversary of hire year.
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 clause.
WHAT IS THE NON-COMPETE BAN?
As mentioned above, the non-compete ban is divided into two subparts based on the executive status of the individual. Let’s take a look…
COACHES THAT ARE NOT SENIOR EXECUTIVES
For coaches who make less than $151,164,it is an unfair method of competition to:
Enter into or attempt to enter into a non-compete clause;
to enforce or attempt to enforce a non-compete clause; or
to represent that the worker is subject to a non-compete clause.
This is a pretty big deal. This means that, as of the Effective Date (August 23, 2024), clubs may not: (1) make anyone making less than $151,164 enter into or attempt to enter into a non-compete clause, (2) they cannot enforce or attempt to enforce a non-compete clause, (3) make representations that the employee is subject to a non-compete clause.
What about Non-Competes executed prior to this announcement? If a coach makes less than $151,164, then, as of the Effective Date (August 23, 2024), clubs cannot enforce the Non-Compete.
COACHES THAT ARE SENIOR EXECUTIVES
For coaches who are Senior Executives (aka- Policy Making Authority and make more than $151,164), it is an unfair method of competition to:
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 (August 23, 2024);
to represent that the Senior Executive is subject to a Non-Compete, where the non-compete is entered into after the Effective Date.
The restriction on these coaches simply means that employer can enforce non-compete terms that were entered into prior to August 23, 2024. So, any non-competes drafted and entered into prior to August 23, 2024 are valid and enforceable for these coaches.
CLUBS ARE REQUIRED TO GIVE NOTICE
Employers (Clubs) who have existing non-compete clauses must notify the coaches that there is a non-compete and the Effective Date as to when the Non-Compete can no longer be legally enforced against the individual. The regulations provide an example of such Notice and the specifications for delivery and content of the notice. Prudent clubs will consult with counsel regarding the requirements of the notice. The notice must be served on employees by the Effective Date.
EXCEPTIONS
The regulations afford for exceptions, including those non-competes that are part of a bona fide sale of a business, and existing causes of action that accrue prior to the Effective Date. Seek counsel to clarify these exceptions.
FINAL THOUGHTS:
Clubs
Review all policies and contracts for non-competes
Where there is a non-compete, evaluate the Senior Executive status of the employee.
Provide written notice in accordance with the regulations
Coaches
Review non-compete agreement and your own status (Senior Executive vs. Non-Senior Executive)
Confidentiality Policies are Still Effective
Employers can still protect their legitimate business interests by drafting and implementing Confidentiality Policies.
Non-Solicits Can Still Valid
As discussed above, the FTC mentioned in their comments that non-solicitation terms are not “Non-Competes” for the purposes of these regulations. Most likely, terms relating to non-solicitation of players and employees will not be considered “Non-Compete” for the purposes of the regulations.
These terms would be evaluated under specific state law parameters. Some states may have prohibitions on non-solicits. Clubs and Coaches are encouraged to consult with counsel to evaluate specific non-solicits.