On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning noncompete agreements nationwide. The final rule defines a “noncompete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Under the final rule, it is an unfair method of competition to:
- Enter into or attempt to enter into a noncompete clause.
- Enforce or attempt to enforce a noncompete clause (for “senior executives,” to do so based on a noncompete entered into on or after the effective date of the regulation).
- Represent that the worker is subject to a noncompete clause (unless the worker is a “senior executive” who entered into a noncompete clause before the effective date of the regulation). The effective date of the rule is 120 days following its publication in the Federal Register (which should happen shortly).
The FTC determined that the rule will promote competition nationwide by protecting the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation. The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the Federal Trade Commission Act (FTC Act)—for persons to, among other things, enter into noncompete clauses (noncompetes) with workers on or after the final rule’s effective date.
Limitations on Existing Noncompete Agreements
However, there are some limitations on the FTC’s ban on preexisting noncompete agreements. Particularly, the applicability of an existing noncompete agreement’s application differs based on the categorization of whether a person is a “worker” or a “senior executive”—the ban on noncompetes applies to “workers,” but not to “senior executives” who are currently subject to a noncompete agreement.
The rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person.” The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship. The rule separately defines “senior executives” as workers earning more than $151,164 a year and who are in a “policy-making position.” For senior executives, existing noncompetes can remain in force, while existing noncompetes with “workers” are not enforceable after the effective date.
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This distinction in categories of employees was made based on the theory that “senior executives” are a subset of workers that are less likely to be subject to the kind of acute, ongoing harms currently being suffered by other “workers” subject to existing noncompetes and because commenters raised credible concerns about the practical impacts of extinguishing existing noncompetes for “senior executives.” On the other hand, for “workers” who are not “senior executives,” existing noncompetes are no longer enforceable after the final rule’s effective date and employers must provide such workers with existing noncompetes notice that they are no longer enforceable. The FTC provides acceptable methods to provide notice to “workers,” and must do so by the effective date of the rule.
However, moving forward, employers will not be able to impose noncompetes on “senior executives” that are not subject to an existing noncompete agreement. In other words, it will be considered an unfair method of competition for a person to enter into or attempt to enter into a noncompete clause; to enforce or attempt to enforce a noncompete clause entered into after the effective date; or to represent that the senior executive is subject to a noncompete clause, where the noncompete clause was entered into after the effective date.
Exceptions to the Rule
The final rule does not apply to noncompetes entered into by a person pursuant to a bona fide sale of a business entity. In addition, the final rule does not apply where a cause of action related to a noncompete accrued prior to the effective date. The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a noncompete or to make representations about a noncompete where a person has a good-faith basis to believe that the final rule is inapplicable. The final rule does not limit or affect enforcement of state laws that restrict noncompetes where the state laws do not conflict with the final rule, but it preempts state laws that conflict with the final rule.
What does this mean for employers moving forward? Because the rule will not take effect for at least 120 days, employers may want to review existing noncompetes to determine if any existing noncompete agreements are with individuals that may be considered “workers.” Another question the rule leaves open is how this ban on “noncompete clauses” could potentially impact other restrictive covenants, such as non-solicitation and confidentiality clauses. Does a non-solicitation clause, for example, “penalize” a worker for obtaining employment with another competing employer. The FTC stated that whether any given contractual provision constitutes a “noncompete clause” is a “fact-specific inquiry.” If the rule goes into effect, litigation is bound to come on these issues. Accordingly, employers may want to consider revisiting any existing noncompete agreements with individuals considered to be “senior executives” to enter into a new agreement before the rule takes effect.
There is no doubt that legal challenges to the rule will be filed. As the U.S. Chamber of Commerce has vowed to sue the FTC to stop the enforcement of the rule, the rule may be stayed for some time, but at this point, it will take effect within 120 days.
This article originally appeared on Wilson Elser.