On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a final rule that would prohibit employers from entering into or enforcing noncompete clauses with most employees. The final rule was published in the Federal Register on May 7, 2024, and is scheduled to take effect 120 days after such date on Sept. 4, 2024. 

Subject to very limited exceptions, the final rule provides that:

• The use of noncompete clauses will be banned as of the effective date;
• Any existing noncompete clauses (other than those entered into with senior executives) will be invalidated;
• Employers must notify all employees (other than senior executives whose existing noncompete agreements will remain enforceable) that their existing noncompete agreements will not be enforced.

The FTC stated that it aims to promote competition by protecting the freedom of workers to change jobs, increasing innovation and fostering new business formation.

---

HIGHLIGHTS

The FTC final rule will:

• Prohibit the use of noncompete clauses for almost all employees as of the effective date;
• Invalidate any existing noncompete clauses (other than those entered into with senior executives); and
• Require employers to notify current and former employees (other than senior executives) that their existing noncompete clauses will be unenforceable.

IMPORTANT DATES

April 23, 2024
The FTC voted to issue a final rule to prohibit employers from entering into or enforcing noncompete clauses with most employees.

May 7, 2024
The final rule was published in the Federal Register.

Sept. 4, 2024
The final rule is scheduled to take effect 120 days after it was filed in the Federal Register.

---

Overview of the FTC’s Noncompete Ban

Background

In general, a noncompete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Currently, the enforceability of a noncompete clause is determined by state and local legislatures and courts. In January 2023, the FTC issued a proposed rule to govern the enforceability of noncompete clauses at the federal level and supersede any less restrictive state laws or judicial interpretations. The FTC then accepted comments on the proposed rule, which it reviewed and considered in drafting the final rule. The final rule was issued on April 23, 2024 and filed in the Federal Register on May 7, 2024. The final rule is scheduled to take effect 120 days after such filing date, on Sept. 4, 2024.

Important Provisions in the FTC Noncompete Ban

The final rule states that noncompete clauses are an unfair method of competition. Therefore, the FTC has voted to ban the use of noncompete clauses in almost all circumstances and to invalidate most existing noncompete agreements. Specifically, the final rule:

• Bans future noncompete clauses—The final rule prohibits employers from entering into or enforcing noncompete clauses in virtually all circumstances beginning on the effective date. Note that employers may still enforce existing noncompete clauses with senior executives but may not enter into new noncompete clauses with senior executives.
• Invalidates existing noncompete clauses—The final rule also prohibits employers from enforcing any noncompete clauses entered into with current or former employees. The rule provides an exception for existing noncompete clauses entered into with senior executives, which may remain enforceable under the rule. However, this exception is very narrow, as the FTC estimates that only approximately 0.75% of workers are likely to be considered senior executives.
• Requires employers to notify employees—Employers must also provide notice to any current or former employees with existing noncompete clauses (other than senior executives who's existing noncompete clauses may be considered enforceable) that such clauses will not be enforced. The notice must be provided on or prior to the rule’s effective date.

The final rule applies to noncompete agreements with all current and former workers, whether full-time or part-time, including but not limited to employees, independent contractors, interns, externs and apprentices. However, employers should note that the FTC ban will only prohibit post-employment noncompetes. Employers may still restrict employees from engaging in competitive activities while employed with the employer.

Key Definitions in the Final Rule

The FTC defines the following key terms in the final rule:

“Noncompete clause” is a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

• 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
• Operating a business in the United States after the conclusion of the employment that includes the term or condition;
• “Senior executive” is a worker who was in a policy-making position and earned more than $151,164 in annual compensation during the preceding year (including salary, commissions, bonuses and any other compensation agreed to that the worker knows and can expect but excluding items like benefits or board and lodging); and
• “Term or condition of employment” includes but is not limited to a contractual term or workplace policy, whether written or oral.

Exceptions to the Noncompete Ban

The final rule bans noncompete clauses in virtually all circumstances. However, the final rule provides a few narrow exceptions to the ban, including:

• Bona fide sale of business—The requirements of the final rule do not apply to a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets;
• Existing causes of action—The final rule does not apply where a cause of action related to a noncompete clause accrued prior to the effective date of the final rule; and
• Good-faith belief that the final rule is inapplicable—The FTC will not consider it to be an unfair method of competition to enforce or attempt to enforce a noncompete clause or make representations about a noncompete clause where a person has a good-faith basis to believe that the final rule is inapplicable.

In addition to the above exceptions, the final rule does not apply to any of the following:

• Banks;
• Savings and loan institutions;
• Federal credit unions;
• Common carriers;
• Air carriers; and
• Certain nonprofit organizations.

Enforcement of the Final Rule

The final rule states that the use of noncompete clauses in violation of the rule is considered an unfair method of competition in violation of the FTC Act. The FTC may enforce the final rule either through enforcement actions or civil litigation. Moreover, while the final rule does not contemplate a private right of action, an employee can file an action seeking court judgment that any illegal noncompete clause is unenforceable. Employers may be subject to additional actual and punitive damages if they attempt to enforce an illegal noncompete.

CONTINUE READING 

---

Contact an SSG Benefits Advisor to learn more.