FTC’s Final Rule Bans Employers from Using Non-Compete Agreements – But Legal Challenges Are Underway

By: Laura M. Raisty

After a public hearing on April 23, 2024, the Federal Trade Commission (“FTC”) adopted a final rule that will ban all workplace non-compete agreements with workers of for-profit businesses, finding that such agreements are an unfair method of competition under § 5 of the FTC Act.  The rule was narrowly approved by a 3 to 2 vote along party lines and has an effective date of September 4, 2024.

Who and What Agreements are Covered by the Final Rule?

According to the FTC, a non-compete clause is a term or condition of employment that prohibits a worker from, penalizes a worker for, or prevents a worker from seeking or accepting employment with any other person in the United States or operating a business in the United States (1).  The final rule defines the term “worker” very broadly, as it encompasses all current and former employees and independent contractors.  The rule will apply to employers within the FTC’s jurisdiction, including a natural person, partnership, corporation, association, or other legal entity, or any division or subsidiary of any such entity.

What Does the Final Rule Achieve?

When (and if) the final rule becomes effective on September 4, 2024, it will ban all new non-compete agreements for all workers as of the effective date. For non-competes in existence before the effective date, they will also be banned, unless the worker is a “Senior Executive.”  A Senior Executive is a worker in a policy-making position with an annualized compensation of at least $151,164.  

In addition, for those workers who have existing non-competes and are not Senior Executives, employers must provide them with notice that they are no longer enforceable.  The FTC has provided model language in the final rule to “facilitate compliance and minimize burden” with this requirement.

Are There Exceptions to the Final Rule?

Non-compete clauses with a seller of a business entity are exempt from the final rule, as long as the sale involves the disposition of the person’s ownership interest in the business entity or of all or substantially all of a business entity’s operating assets.

In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.  In other words, litigation commenced prior to the effective date that seeks to enforce a non-compete is unaffected by the final rule.

Finally, the final rule provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the final rule itself is inapplicable. 

What’s Next?

The rule is being challenged by lawsuits filed by a number of business groups, most notably including the United States Chamber of Commerce, in which they seek to block implementation of the rule by arguing, among other things, that the FTC lacks the authority to regulate this area because Congress has not empowered it to do so.  These lawsuits will likely delay the September 4, 2024 effective date of the rule.

Our team will continue to monitor developments relating to the final rule, and employers and employees with questions are encouraged to contact an employment attorney at Kenney & Sams.

(1) According to the FTC, whether a contractual provision is a non-compete is a “fact specific inquiry.”  As a result, while the rule does not explicitly cover non-solicitation agreement or confidentiality agreements, they may nonetheless constitute a non-compete if it falls within the final rule’s definition of a non-compete clause.

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