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  >  Employment Articles   >  FTC Approves Final Rule Prohibiting Non-Compete Agreements for Most Private Employers – What You Need to Know

FTC Approves Final Rule Prohibiting Non-Compete Agreements for Most Private Employers – What You Need to Know

On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule prohibiting non-compete agreements in many, but not all circumstances. This is among the most comprehensive non-compete bans ever issued by the Federal Government and applies to employees at all levels, with limited exceptions. The rule, first proposed in 2023, was approved 3-2 along party lines and is already facing legal challenges. The final rule is scheduled to become effective 120 days after its publication in the Federal Register. This date is anticipated to be September 4, 2024, pending the result of the legal challenges.

The final rule broadly bans all true non-compete clauses. The rule defines a “non-compete clause” as a term or condition of employment that prohibits a worker from, penalized a worker for, or functions to prevent a worker from seeking or accepting work at the conclusion of employment, or operating a business after the conclusion of employment. Only entities that are explicitly exempt from the jurisdiction of the FTC are not covered by the rule. This includes non-profits, banks and credit unions, and common carriers/air carriers. 

Supplementary material published with the rule suggests that overly broad restrictive covenants in employment contracts such as non-disclosure or non-solicitation agreements may also “function to prevent” a worker from seeking or accepting another job. Accordingly, such agreements should be drafted with care and with the rule in mind. 

The rule applies to all current and former workers regardless of position, title, or status. The rule also applies to senior executives and c-suite employees, who have final authority to make policy decisions that control a significant aspect of the business and who are making at least $151,164.00 annually. However, existing non-compete agreements for senior executives can remain in force from the rule’s effective date. 

The rule expressly includes two limited exceptions where it does not apply to covered entities. First, it does not apply to a noncompete clause in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially of a business entity’s assets. Massachusetts employers should further note that there is an additional requirement under state law permitting the limited use of a non-compete in the sale of a business, however, the person restricted by the non-compete must have been a significant owner of – or a member or partner in – the business entity and will receive significant consideration or benefit from the sale.

The second exception is the rules does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.” It should be noted that the rule expressly provides that it is not an unfair method of competition for a party to attempt to enforce a non-compete where the person has a good faith basis to believe that the final rule is inapplicable. 

The rule does not contain a requirement that employers affirmatively rescind any agreement banned as of its effective date. However, employers must give notice to workers who entered into a non-compete that the non-compete is now unenforceable. The notice must be “on paper” but may be delivered by email or text messages. The rule contains model language that employers may use to comply with the requirement: 

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

  • You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
  • You may run your own business—even if it competes with [EMPLOYER NAME].
  • You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME]. The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes.

As anticipated, legal challenges to the final rule have already commenced. Federal lawsuits in Texas may enjoin or delay the enforcement of the final rule. While the public waits to see the fate of the rule, employers should take care to narrowly draft restrictive covenants to protect their legitimate business interests, such as trade secrets, confidential information, or goodwill that is unique to the employer. Agreements should also contain clauses that if any part of the agreement is found to be unlawful other parts of the agreement such as confidentiality and non-solicitation provisions will remain in effect. 

Employers should note that regardless of whether the rule banning non competes survives judicial review, modern courts are subjecting restrictive covenants in employment contracts to additional scrutiny and the trend has been to disfavor overly broad non-competition agreements.

Due to these legal challenges, and the current Supreme Court, this rule is likely never to go into effect. Still, the rule reflects the modern trend of courts, legislatures, and regulators toward disfavoring restrictive covenants in employment contracts. Thinking about how your business may look without these covenants in the future is worth considering now. 

Nicholas A. Rossini

nar@ddcrwlaw.com 

The above is for information purposes only and does not create an attorney client relationship. If you wish to discuss the content of this post with an attorney please contract Doherty, Dugan, Cannon, Raymond & Weil, P.C.