On April 23rd, 2024, the Federal Trade Commission (FTC) approved a final rule that effectively bans the use of non-compete agreements by U.S. based employers. The final rule is substantially similar to the proposed rule announced in January 2023, and represents a sweeping change in the ability of employers to rely upon preexisting as well as future non-compete clauses to protect against unfair competitive practices. The final rule will go into effect 120 days after its publication in the Federal Register, which is expected shortly.
The final rule defines a non-compete clause as any agreement that prohibits, penalizes or functions to prevent a worker from (1) seeking or accepting work in the U.S. with another employer or (2) operating a business in the U.S., after a separation of employment.
The Scope of the FTC Ban
The final rule prohibits employers from engaging in the following activities:
- Entering or attempting to enter into any agreement containing a non-compete clause with any “worker”, including senior executives, independent contractors or other workers.
- Enforcing or attempting to enforce the terms of any pre-existing non-compete clause except for an agreement with a senior executive employee earning a total compensation of $151,164 per year or more, which can still be enforced by an employer.
- Representing to any employee or other worker that they are subject to a non-compete clause, or in the case of a senior executive, that they are bound to a non-compete that was entered into after the effective date of the rule.
The Notice of the Non-Enforceability Requirement
Prior to the effective date of the rule, employers must provide a clear and unambiguous written notification to any current or former employee subject to an impermissible non-compete clause that it will not be, and cannot be, legally enforced against the worker. The final rule includes model language that can be used by employers to comply with the various notice requirements.
The Sale of a Business Exception
Non-compete clauses entered into by a former owner of a business as part of a bona fide sale of the business or franchise agreements are not subject to the rule.
Next Steps for Employers
There are several reasons for employers not to overreact to the FTC’s rule. First, the U.S. Chamber of Commerce has already filed suit in Texas to challenge the Final Rule as an overreach of the FTC’s regulatory authority, and other industry groups may follow suit. Enforcement of the final rule may be enjoined by the courts while the legal challenges are litigated, and there is potential that it will never go into effect.
In addition, even if the rule is not enjoined or invalidated, employers have 120 days to identify those current and former employees who are subject to non-competes that fall within the prohibitions, and be poised to issue the required notification of non-enforcement by the effective date.
Finally, there are other measures short of non-competes that can be incorporated into employment contracts to protect against unfair competitive practices be former employees. Carefully crafted client and employee non-solicitation clauses can bar a former employee from poaching clients and employees for the benefit of a competitor. Confidentiality and non-disclosure clauses can protect against the use of employer trade secrets and other proprietary information. Whereas non-compete clauses have been under siege on both the federal and state levels (e.g., California’s ban on non-competes), employers should take this opportunity to strengthen these alternative post-employment restrictions.