FTC Issues Final Rule Effectively Banning Workplace Non-Compete Agreements

UPDATE: The final rule will be published in the Federal Register on May 7, 2024.

  • The effective date of the final rule is 120 days after publication in the Federal Register.
  • After the effective date, non-compete agreements with all workers are banned nationwide.
  • For non-compete agreements existing prior to the effective date, those with “senior executives” may remain in force, while those with all other workers are not enforceable after the effective date.
  • There is a sale-of-business exception for non-competes entered into in connection with a sale of business.
  • Employers must provide notice to employees regarding existing agreements declared unenforceable under the final rule.
  • The final rule is certain to face legal challenge including an imminent lawsuit from the U.S. Chamber of Commerce.

On April 23, 2024, the Federal Trade Commission (FTC) by a vote of 3-2 approved and issued its final rule that effectively bans employers’ use of all non-compete agreements (with very limited exceptions). The final rule is scheduled to go into effect 120 days after it is published in the Federal Register.

The Final Rule

What agreements are covered under the rule?

The rule 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: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

This broad prohibition covers agreements with any worker, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The rule applies to any person or employer, including a natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction, including any person acting under color or authority of state law, which effectively includes all persons or businesses operating for profit.

What about existing non-compete agreements?

Existing non-competes for all workers who do not qualify as “Senior Executives” are effectively banned. Under the final rule, it is an unfair method of competition: (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause (for Senior Executives, to do so based on a non-compete entered into on or after the effective date of the regulation); or (iii) to represent that the worker is subject to a non-compete clause (unless the worker is a Senior Executive who entered into a non-compete clause before the effective date of the regulation).

Employers are required to provide “clear and conspicuous notice” to all workers whose agreements have been declared unenforceable by the final rule that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker, by the effective date. This notice must be in written form and delivered by hand, mail, email, or text message; the final rule provides model language for this notice.

Who qualifies as a “Senior Executive”? 

As noted, pre-existing non-competes with “Senior Executives” are not invalidated by the final rule. We anticipate that whether any given employee falls within this category will be hotly debated and litigated if legal challenges to the regulation itself are not successful.

The regulation defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments).

A “policy-making position,” according to the final rule, is a business’ president, CEO or equivalent, or any other person with “policy-making authority” for the business similar to a corporate officer with policy-making authority. The term “policy-making authority” in turn means the authority to make policy decisions controlling “significant aspects of a business entity or common enterprise.”  Expressly carved out, are positions that only have the ability to “advis[e] or exert influence over such policy decisions” or positions only having “final authority to make policy decisions for . . . a subsidiary of or affiliate of a common enterprise.”

Does the rule sweep in other types of restrictive covenants, such as non-solicits and confidentiality agreements?

As noted above, “non-compete clause” includes a “term or condition” of employment that “prohibits,” “penalizes” or “functions to prevent a worker from” seeking or accepting work after the end of their employment. The FTC states that whether any given contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.” If the rule survives, we anticipate significant debate and litigation around this “fact-specific inquiry,” and what does and does not fall within the “non-compete clause” definition. 

Are there other exceptions to the rule?

Exempt from the rule are non-compete clauses entered into with a seller of a business entity, so 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. 

Further, the ban does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date,” i.e., the regulation does not make currently ongoing litigation seeking to enforce a non-compete unlawful. The rule also includes a “good faith” exception providing 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 non-compete ban is inapplicable.

What about state laws governing non-compete provisions?

The regulation makes clear that the final rule “shall supersede” all state laws, regulations, orders, and interpretations of them that is not consistent with the requirements discussed above. States could still impose requirements and restrictions with respect to non-compete clauses if they afford greater “protections” than those provided by the final rule.

What Happens Next?

The FTC’s final rule will be subject to legal challenge. Indeed, the Chamber of Commerce has already announced it intends to initiate litigation as early as Wednesday, April 24, and a tax services and software provider has filed litigation in Texas challenging the regulation. How long it may take courts to determine whether the regulation is lawful is less clear. Because the regulation, if it is upheld, requires employers to provide notice to non-Senior Executive employees and former employees subject to non-compete clauses, employers may wish to plan for what providing notice to these employees would require.

Now is also a good time for businesses to take a close look both at existing non-compete clauses and other contractual provisions that may be argued to function as a non-compete provision under the regulation, including non-disclosure, non-solicitation, and provisions requiring employees to reimburse employers for certain training expenses. Where the legal fate of the regulation is uncertain, employers may wish to prepare for these eventualities but defer implementing changes to address them for as long as practicable until these challenges are resolved. Nonetheless, employers should also continue to be strategic with the use of their non-compete, non-solicitation and non-disclosure agreements and should confer with employment counsel to consider multiple options to ensure adequate protection of their confidential information, trade secrets and goodwill.  

On April 25 at 11:00 a.m. PT/ 2:00 p.m. ET, Littler will also host a complimentary live webinar entitled, “Everything You Need to Know About the FTC’s Final Rule on Noncompetes in 30 Minutes.” All interested in learning more are welcome and encouraged to attend.  

Littler’s Workplace Policy Institute and Unfair Competition and Trade Secrets practice group will continue monitoring these developments and keep readers apprised of significant developments.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.