FTC Bans Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule effectively banning non-compete agreements in the employment context. This final rule follows a proposed rule published by the FTC on January 5, 2023. The final rule, which by its terms goes into effect 120 days after its publication in the Federal Register unless enforcement is halted by the courts, not only prohibits employers from entering into non-competes going forward, but also invalidates existing non-compete agreements for all employees, except for defined “Senior Executives.” While the final rule is already facing immediate legal challenge by the U.S. Chamber of Commerce in a lawsuit filed today and very likely other trade associations and employers in the near future, including efforts to enjoin the final rule from going into effect, if the final rule is allowed to remain in place, it will have a major impact on the U.S. employment and business landscape.

Coverage of the Final Rule

As explained in our alert regarding the proposed rule, the FTC has determined that non-compete agreements in the workplace are unfair methods of competition that violate Section 5 of the Federal Trade Commission Act. Therefore, on a going forward basis, it has prohibited businesses from entering into non-competes with their workforce. This ban applies whether workers are executives or not (subject to the provisions below), are classified as employees or independent contractors, and/or are paid or unpaid.

Notably, a “non-compete clause” is defined broadly to include any term or condition of employment that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” A “non-compete clause” can include, without limitation, a contractual term or workplace policy, whether written or oral. Because this definition is functional, the label attached to the clause is not definitive as to whether it would be considered a non-compete for purposes of the rule. In this regard, other types of clauses, such as non-solicitation, non-disclosure, or training repayment provisions, could also fall within the scope of the rule if they have a practical or deterrent effect that is similar to that of a non-compete.

Notably, the final rule does not apply in the sale of business context and contains a specific exception that allows non-competes between the buyer and the seller(s) of a business.

Existing Non-Competes

Under the final rule, existing non-competes are also effectively banned for all workers except for “Senior Executives,” defined as a worker earning more than $151,164 per year (including salary, commissions, and/or non-discretionary bonuses, but excluding benefits) who is in a “policy-making position.” A “policy-making position,” in turn, “means a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”

For all existing non-competes other than those with Senior Executives, the employer must, prior to the effective date of the final rule, provide its workers with notice that the non-compete provision “will not be, and cannot legally be, enforced against the worker.” This notice must be “clear and conspicuous,” and must be personally delivered, mailed, emailed, or sent by text message to the worker’s last known contact information. The rule includes sample language that the employer may use for this purpose.

Next Steps

As noted above, the U.S. Chamber of Commerce has already filed suit today arguing, among other things, that the FTC overstepped its authority and into the purview of Congress by issuing the rule. We will carefully monitor this action (and likely others) and issue further alerts as significant developments arise, including if enforcement of the rule is enjoined pending final decision(s) from the courts. Even if the rule is allowed to go forward, we anticipate that there will be a great deal of litigation regarding its interpretation, such as questions regarding whether certain provisions or agreements fall within the definition of a prohibited “non-compete clause” or whether specific individuals are properly classified as “Senior Executives.”

In the meantime, employers should begin making plans to comply with the rule. Given the rule’s notice requirements, employers should compile a list of workers who are not Senior Executives with whom they have existing non-compete agreements, as well as the relevant contact information for such workers, so that they will be prepared to give notice of the unenforceability of particular clauses that fall within the rule’s prohibition closer to the effective date (if it then is likely that implementation of the rule will go forward). Employers also should plan to revise any form agreements with their workers that contain non-compete clauses. Finally, employers should consider alternative ways, besides non-compete agreements, to protect their confidential information and trade secrets, and the other significant investments made in their workforce.

If you have any questions regarding the final rule or its effect on your workplace, please contact any member of the AGG Employment team.