FTC Issues Final Rule Which Bans Non-Compete Agreements Nationwide for Most Employers

On April 23, 2024, in a 3-2 vote, the Federal Trade Commission (FTC) issued a final rule banning non-compete clauses in most employment agreements nationwide. The rule is scheduled to go into effect 120 days after it is published in the Federal Register. 

GreeneHurlocker’s corporate clients who negotiate to include non-compete clauses in employment agreements or other documents should contact us to discuss the implications of this rule relative to their individual circumstances. Violating the rule, after it goes into effect, can result in fines, penalties, and other injunctive relief. Here are some of the key provisions of the rule. As discussed below, the ban does not affect non-competes associated with the sale of a business, which is an important exception for many of our clients.

What Businesses are Covered?

The final rule covers all entities subject to the FTC Act (generally, most for-profit entities). Certain non-profit organizations and financial institutions are exempt from the FTC’s jurisdiction and thus are not subject to the rule. The ban does not apply to contracts between franchisees and franchisors. However, it does apply to employees working for either a franchisee or a franchisor.

What is a “Non-Compete Clause” Under the Rule?

A “Non-compete clause” is defined as “a 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.” 

Does the Ban Apply to All Employees?

Starting from the effective date, the ban prohibits all new post-employment non-compete agreements between employers and employees across all industries and worker types, including both “senior executives” and lower-level employees. “Worker” is broadly defined to include natural persons who are employees, independent contractors, interns, externs, volunteers, or sole proprietors providing services. 

What About Post-Employment Non-Compete Agreements Already in Place?

Existing post-employment non-compete agreements may continue to be enforced, but only for “senior executives,” which is a term with a fairly nuanced definition, as described below. While employers are not obligated to formally rescind existing non-compete agreements, they are required to notify current and former workers (identifying the employer in the notice, delivered personally to the worker by mail, email or text message) by the effective date that post-employment non-compete agreements are no longer enforceable. 

What About In-Term Employment Non-Compete Agreements?

The ban does not apply to agreements prohibiting an employee from competing against an employer while employed. 

Who is a “Senior Executive”?

The definition of a “senior executive” is generally an employee who d earns total compensation (including salary, commissions, and nondiscretionary bonuses, among other forms of compensation) of at least $151,164 and holds a “policy-making position.”   “Policy-making position” 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.   Determining what “policy making position” means in a given client context could involve some judgment calls.

Are There Any Exceptions?

The rule makes an exception for non-compete agreements in the following circumstances:

• Entered into in connection with the sale of a business; 
• Where a cause of action related to a non-compete clause accrued prior to the effective date; or
• Where a person otherwise has a good faith belief that the rule is inapplicable.

Does the FTC Have Authority to Do This?

Time will tell. We anticipate that a number of legal challenges to the FTC’s authority to ban non-compete agreements will be mounted. We will continue to keep you informed of new developments, however, for the time being, it’s important for businesses to assume that the ban on non-compete agreements will survive judicial scrutiny, and prepare accordingly.

What Steps Should Be Taken?

The most time-sensitive issue businesses must address is the affirmative duty to provide notice by the effective date to impacted workers that post-employment non-compete agreements are no longer enforceable. However, there are a number of other issues raised by the rule (e.g., who is a “senior executive,” including what is a “policy making position” and does a Vice President qualify?), as well as strategic considerations (e.g., what should our strategy be moving forward to guard our competitive advantage?), that should be discussed with legal counsel.

We will continue to keep you apprised of new developments related to the rule. In the meantime, contact us to discuss questions and implications of the rule on your business.