FTC Bans Noncompete Agreements to Open Roads to Competition

Today the Federal Trade Commission announced the final rule to ban noncompete agreements. The final rule takes effect 120 days after publication in the Federal Register, likely late August 2024. The final rule applies to all for-profit businesses other than certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and persons subject to the Packers and Stockyards Act of 1921.

A “noncompete clause” means “a term or condition of employment that prohibits a worker from, penalizes a worker for, or 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 that includes the term or condition.”

The final rule applies to any “worker,” meaning any natural person who works, either paid or unpaid, for an employer, including without limitation “an employee, independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a person.”

New noncompetes are banned for all workers, including senior executives, after the effective date. Existing noncompetes may remain in effect for senior executives. A "senior executive" is a worker earning more than $151,164 annually and is in a “policy-making position.”

Employers must provide notice to employees that their noncompetes are no longer enforceable and the FTC provides proposed language for the notice.

The final rule does not prohibit employers from having other restrictive covenants with employees such as nonsolicitation restrictions and nondisclosure agreements. The final rule does not apply to noncompetes entered into by a person pursuant to a bona fide sale of a business entity. The final rule will preempt state laws in conflict with it.

In the public meeting on April 23, 2024, the FTC offered several reasons in support of the final rule. It stated that noncompetes inhibit efficient matching between workers and employers by limiting competition. The FTC expects the final rule to increase worker earnings and spur new business formation and innovation. Finally, the FTC believes the final rule will reduce exploitation and coercion of workers who are currently bound up in non-competes.

In balancing the business interests, the FTC found that business interests can be better protected through less restrictive alternatives (such as trade secret law, intellectual property law, and nondisclosure agreements) and investing in employees through fixed duration contracts and competitive pay/benefits. In sum, the FTC held that the benefits from these claimed business justifications for noncompetes do not justify the harms from noncompetes.

The vote to adopt the final rule was 3 commissioners in favor and 2 against. Commissioners Holyoak and Ferguson dissented from the final rule. Commissioner Holyoak stated that she believes the FTC is exceeding its statutory authority and does not believe the final rule will be upheld in the face of legal challenges. Among other reasons, Commissioner Ferguson doesn’t believe the FTC has authority to nullify “millions of existing contracts” in an area that is the “particular domain” of state law. The U.S. Chamber of Commerce has promised to initiate litigation to stop the enforcement of the final rule.

Employers with noncompetes will want to continue monitoring the final rule and legal challenges to it to determine if their noncompetes remain enforceable after the effective date. Employers may also desire to take steps now to address their business interests in ways which will not run afoul of the final rule regardless of legal challenges. Employers should contact an employment lawyer to determine the most efficient and effective way forward for their business and employees.