Employer Alert: FTC Issues Final Rule on Non-Competes

April 26, 2024

On April 23, 2024, the Federal Trade Commission (the “FTC”) issued a final rule (the “Rule) comprehensively banning employers from entering into non-compete agreements with all workers.  

Section 910.1 defines a non-compete clause as “[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." Term or condition includes, but is not limited to, a contractual term or workplace policy, whether oral or written. Often, these agreements will force workers to remain in a job that they want to leave, force workers to relocate, or leave the workforce altogether to avoid significant harm, costs, and potential litigation.  

The FTC anticipates that banning non-competes will increase new business formation by 2.7% per year, result in the creation of more than 8,500 new businesses per year, increase earnings for the average worker by an additional $524 per year, and reduce health care costs by up to $194 billion over the next decade.  

The Rule will become effective 120 days after publication in the Federal Register, unless it is enjoined by the courts.  

What is and is Not Prohibited?  

When the Rule becomes effective, employers can no longer enter into noncompete agreements with workers, nor can they enforce existing non-competition agreements against the majority of workers. The Rule refers to “workers” rather than “employees” because worker is broadly defined to include employees, independent contractors, volunteers, externs, interns, apprentices, or sole proprietors who provide a service to a client or customer. “Worker” does not include a franchisee in the context of a franchisee-franchisor relationship. 

Existing non-competes with senior executives (which are estimated to account for less than 0.75% of workers) can be enforced under the Rule, but employers are prohibited from entering into new non-competes, even those involving senior executives. Senior executives are workers who earn more than $151,164 annually and hold policy-making positions.  

The Rule creates a limited exception that allows non-compete clauses in connection with the sale of a business. Non-competes allowed under the exception will be governed by State and Federal antitrust law, which generally requires a showing that a non-compete is necessary to protect the value of the business being sold. The Rule no longer requires that a restricted party be a “substantial owner of, or substantial member or substantial partner in, the business entity” to fall under the exception. This is narrower than prior versions of the Rule which limited “sale of business” agreements to sellers of 25% or more of the equity of the business.  

What Can Employers Do to Protect Confidential Information? 

Employers have several alternatives to protect their proprietary information without having to enforce a non-compete. For example, an employer can utilize non-disclosure agreements (“NDAs”) to protect proprietary and sensitive information.  

NDAs can prohibit the disclosure of confidential or proprietary information or knowledge that a worker may obtain during their employment. 

Are Non-Solicitation Agreements Prohibited? 

The Rule does not explicitly restrict employers from utilizing general non-solicitation agreements, which are typically used to prevent an employee from soliciting a former employer’s customers and/or employees for a period of time after the employee departs. Given the broad definition of "non-compete” under the Rule, however, one might argue that a non-solicitation agreement which functions to prevent a worker from accepting other employment might be considered to violate the Rule. 

What Must Employers Do to Inform Employees About the Rule?  

Once it goes into effect, the Rule will require employers to notify workers who are bound by an existing non-compete agreement that the agreement will not be enforced against them. The FTC included model language in the Rule to assist employers with communicating this change to workers.   

Potential challenges  

The Rule is already being challenged on constitutional grounds. In fact, the U.S. Chamber of Commerce has indicated that it will sue to block the rule. This could prevent the Rule from taking effect for months or years.