On April 23, 2024, the Federal Trade Commission (FTC) approved and issued its final rule banning employers from entering into new non-compete agreements with employees and voiding many existing non-compete agreements. The FTC defines a non-compete clause as a term or condition of employment that prohibits a worker from, penalizes a worker for, or prevents a worker from seeking or accepting work with a different employer, or operating a business, in the United States after the conclusion of employment with the current employer.
In passing the rule, the FTC determined that entering into non-competes with employees is an unfair method of competition that violates Section 5 of the Federal Trade Commission Act.
The new rule prohibits all new non-compete agreements with all employees after the effective date. The rule will go into effect 120 days after publication in the Federal Register, which means it could become effective as early as August 22, 2024.
The rule also provides that existing non-competes (i.e., those entered into before the effective date) will no longer be enforceable after the effective date. The rule does not apply to existing non-compete agreements with “senior executives,” which the FTC defines as employees who were in a policy-making position and received total annual compensation of at least $151,164 (or the annualized equivalent of that amount) in the preceding year. The FTC estimates that this exception applies to less than 1% of workers. However, once the rule is effective, employers may not enter into a new non-compete agreement with a senior executive or any other employee.
Importantly, although the rule does not require formal recission of non-compete clauses, it requires employers to provide all current and former employees with existing non-compete agreements (other than senior executives) with “clear and conspicuous” written (e.g., email or paper) notice before the rule’s effective date that the employee’s non-compete clause cannot and will not be enforced against the employee after the rule takes effect. The rule includes a model notice and provides a safe harbor provision for employers using the model notice.
Notably, the rule generally does not apply to other restrictive agreements, including non-solicitation, confidentiality, and non-disclosure agreements unless those provisions include language broad enough to function as a non-compete under the FTC’s definition.
The rule will face legal challenges before its implementation, including a lawsuit already filed in federal court by the United States Chamber of Commerce and other business groups intending to prevent the rule from taking effect. Despite this, employers should begin preparing for the rule to go into effect. This includes evaluating existing contracts, tracking new non-compete clauses, and, as the rule gets closer to implementation, preparing required notices. Consulting and Enterprise members are advised to contact an Employers Council attorney for assistance with preparing for the new rule and evaluating the effect on the member’s business. We will continue to monitor this matter for any further developments.
John Zubek is an employment law staff attorney for Employers Council.