FTC Ruling Banning Noncompetes:
The Federal Trade Commission (“FTC”) issued a final rule on April 23, 2024 that bans noncompetes, with few exceptions. The final rule goes into effect on September 4, 2024, unless there is court intervention before then.
In essence, the rule bans noncompetes as a violation of Section 5 of the FTC Act (unfair method of competition).
Various court challenges (already pending) are expected to result in prevention, or at least delay, of the implementation of the new rule. The first ruling related to these challenges is expected in July.
Existing Noncompetes
Noncompetes with senior executives (defined as workers with a policy making position who earn more than $151,164 annually) are excluded from the ban, and existing agreements with such persons remain enforceable. However, going forward from the effective date, new noncompetes entered into with senior executives violates the FTC ruling.
For other workers, by the effective date, employers must notify all workers / ex-workers who were subject to a noncompete agreement that the agreement is no longer enforceable. Form language is provided by the FTC and the proper methods of delivering notice are outlined by the FTC. Legal recission of prior agreements is not required.
Exceptions:
- Senior Executives – prior agreements only, as discussed above
- True nonprofits
- Banks
- Common Carriers
- Sale of a Business
- Franchisor/Franchisee
- Noncompetes that restrict working outside the US or starting a business outside the US
What Employers Can Still Do:
Provided they are not so broad as to restrict employment, NDAs, client or customer non-solicitation agreements, severance agreements, training repayment agreements, and other restrictive employment agreements are unaffected by the new rule.
Definitions for Understanding the Rule:
Worker – a natural person who works, or who previously worked, whether paid or unpaid, including employees, independent contractors, interns, volunteers, apprentices, sole proprietors. Because a “worker” is a natural person, noncompetes between businesses are not impacted by the ruling.
Noncompete clause – a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- seeking or accepting work within the US with a different person where such work would begin after the conclusion of the employment that includes the term or condition, or
- operating a business in the US after the conclusion of the employment that includes the term or condition.
We will monitor the progress of the pending cases challenging the final rule to keep our clients informed of any changes to the effective date.
