The Federal Trade Commission (FTC) issued their final Noncompete Rule on April 23, 2024. If this rule survives the already pending legal challenges, it will mean significant changes for employers and employees who have traditionally operated under non-compete agreements.
The Rule adopts a comprehensive ban on noncompete agreements for all workers nationwide. Significantly, for most workers, existing noncompetes will not be enforceable after the Rule’s eLective date. The “eLective date” is 120 days after publication in the Federal Register, which could be as soon as September 4, 2024, though it is likely to be pushed back due to the pending legal challenges.
The Rule have limited exemptions for (i) existing agreements with senior executives entered into prior the Rule’s eLective date, and (ii) existing and future agreements entered into pursuant to a sale of a business. To qualify as a “senior executive” under the Rule, the employee must earn more than $151,164 annually and be in a “policy making position.”
The FTC’s 3-2 vote on April 23rd in favor of this change was centered on concerns that the broad use of noncompete agreements harms fair competition and freedom of labor. The FTC issued a statement further citing data that noncompete clauses in employment agreements contribute to keeping wages low and suppressing new ideas.
The rule applies to anyone who has signed or anticipates signing a noncompete agreement as a term of their employment, and their employers. The FTC estimates that an estimated 30 million American workers are currently subject to a noncompete agreement. The Rule would also override any state law or practice that is inconsistent with this ruling. In their lawsuit, the Chamber of Commerce has challenged that the FTC does not have the authority to enact this new Rule.
Notably, the Rule suggest that other restrictions, such as nondisclosure and nonsolicitation clauses, may remain enforceable, provided that such clauses are narrowly drafted and do not, by their terms or eLect, “function to prevent a worker from seeking or
accepting other work or starting a business after their employment ends.” Any provision that attempts to restrict a worker postemployment will be subject to inquiry as to whether it qualifies as a noncompete on a fact specific basis, regardless of the label used for such terms in the agreement.
Employers should audit their existing noncompete agreements and employment arrangements to see which may no longer be enforceable and which may apply to senior executives excluded from the new Rule. Employers should also prepare to give notice to workers with existing noncompetes (who are not senior executives) that the noncompetes are no longer enforceable, as this is required under the Rule should it survive the legal challenges. Employers should follow this developing area closely. We anticipate that the Federal courts will issue a stay on the eLective date of this new Rule until the legal challenges can be heard.
