The Federal Trade Commission (FTC) has recently announced a transformative rule in business law concerning non-compete agreements signed by employees, set to significantly alter the landscape for businesses in general, as well as in franchising. As franchise owners (both franchisors and franchisees), it is crucial to understand this change, particularly how it impacts your relationship with employees and overall franchise operations. Here we will cover the new FTC rule’s specifics and help you prepare for its implementation on September 4th, 2024.

Overview of the New FTC Rule on Non-Compete Agreements: The FTC’s new regulation marks a pivotal shift in employee contracts: the non-enforceability of non-compete clauses. This rule is designed to enhance employee mobility and competition, asserting that non-compete agreements are no longer permissible between franchisors and their employees, as well as franchisees and their employees. Understanding the details of these regulatory updates is essential for ensuring legal compliance within your franchise system. However, this rule does not impact a franchisee’s obligation not to compete with its franchisor. These non-competes are specifically exempt under the rule.

How the Rule Affects Franchise Owners: For franchisors, the rule underscores the need to revisit and revise existing franchise agreements; wherein, franchisees may be required to obtain signed non-compete agreements with their employees. While non-compete terms typically found in franchise agreements (relative to the franchisee’s obligation to the franchisor) remain enforceable, any non-compete agreements required of the franchisee’s employees are no longer enforceable. This change will require revisions to current and future franchise agreements to avoid franchisees violating the new FTC rule. Expect that state examiners will soon be looking for compliant FDDs relative to the rule change.

Enforceability of Non-Compete Agreements Between Franchisees and Employees: Given the FTC’s stance, franchise agreements that include employee non-compete agreements (see exhibits) must be removed. Again, the rule aims to prevent limitations on employees who wish to change jobs within the same industry, thereby affecting how franchises manage their human resources and legal obligations under the new franchise law regulation. However, these employees, as well as the franchisor’s employees, may still be required to sign confidentiality agreements to protect the franchisor’s proprietary information. This covenant is not affected by the new rule, nor is the agreement preventing out-going employees from stealing customers or co-employees from the franchise employers.

Implications for Franchise Agreements and Compliance Requirements: Franchise owners must now ensure that their business contracts do not infringe upon the new guidelines set by the FTC. This involves a thorough audit of franchise agreements (and franchisor employment agreements offered to their staff) to align with the latest rule change. Additionally, franchisors should provide clear guidance to franchisees about these changes to foster smooth transitions and adherence to legal restrictions.

Important Deadline for Franchisors to Be Aware Of: Mark your calendars for September 4th, 2024 — the official date when the new FTC rule takes effect. Leading up to this deadline, franchisors should engage in preparing franchisees for the new FTC non-compete rule, ensuring all practices, agreements, and operations comply with the upcoming changes. Legal advice on compliance with the FTC rule under franchise agreements is highly recommended to navigate this transition effectively.

Franchisors and franchisees, understand that if you have active, signed non-compete agreements with employees (current or former), the new FTC rule requires that you serve these employees with written notice of the rule change. Note that the FTC provides a form for an approved notice, which you will find here: (See pg 38504) Plan to serve these notices this summer.

The FTC’s new rule on non-compete agreements represents a significant shift in employer – employees relations. By understanding and preparing for this change, you can ensure that your franchise remains both competitive and legally compliant. Take proactive steps now to consult with legal experts specializing in franchise law to adapt your business practices and agreements, accordingly.

Don’t wait until the last minute. Review your franchise agreements today and consult with a franchise specialists, such as Kilcommons Law PC, to ensure your business satisfies the new FTC regulation. Preparing ahead will help safeguard your business interests and maintain smooth operations across your franchise system.

© Kilcommons Law, P.C. 2024