Issued April 23, 2024 and updated April 24, 2024 and May 10, 2024
Major news just hit on noncompetes! In a 3 to 2 vote, the Commissioners of the Federal Trade Commission just voted to implement a final rule that will ban all new noncompete restrictions in employment for workers but will leave intact existing noncompete agreements for senior executives. The final rule is expected to go into effect on September 4, 2024 ("effective date"), 120 days from the date the rule was published in the Federal Register, if it survives current attempts to invalidate or delay its implementation.
The final FTC rule will prohibit employers from entering into new noncompete agreements with all workers as of the rule’s effective date and also require employers to affirmatively notify workers who are not senior executives that their prior noncompetes are void and will not be enforced by the employer. The term "workers" are defined under the rule extremely broadly and includes any person who works or who previously worked for an employer (whether paid or unpaid), including, but not limited to employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service to a person, and a person who works for a franchisee or franchisor who is not a franchisee in a franchisee-franchisor relationship. An unlawful noncompete means a restriction that has the effect of "prohibiting the worker from seeking or accepting employment."
The rule has some exceptions. Organizations can continue to enforce noncompetes in connection with the sale of a business against an owner who sells all or substantially all of a business entity’s operating assets and those noncompetes for senior executives that were in effect before the effective date of the rule. Senior executives includes those individuals who earned annual compensation of at least $151,164 and were in a policy-making position at the organization. It is designed to include those at the highest level of an organization with “ final authority to make policy decisions that control significant aspects of a business entity or a common enterprise” and could include presidents, chief executive officers,, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and others with such policy-making authority.
Importantly, the prohibition on noncompetes does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date" of the rule, meaning employers are allowed to continue litigating ongoing lawsuits in which they seek to enforce a non-compete against an employee that the entity believes breached the agreement before the effective date of the rule. The rule also includes a “good faith” provision that states that it is not unlawful to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clauses being still effective where a person has a good-faith basis to believe that the non-compete ban is inapplicable.
This rule is being implemented following 26,000 comments from the public that the FTC received in response to an earlier version of the rule that the agency issued for public comment in January 2023. The news was broadcast live in a public vote by the Commissioners. The three FTC Commissioners who voted in favor of the rule cited the huge negative impact that these agreements have on workers’ careers and the chilling effect that they have on experienced high-level executives being able to start new businesses. The two dissenting Commissioners seemed most concerned about legal challenges to the FTC’s authority to issue such a consequential rule, noting that such power rests with Congress and the states, and that the FTC should instead regulate noncompetes on a case by case basis.
The final rule expressly states that states are permitted to restrict noncompetes as long as such state laws do not conflict with the FTC’s final rule. Otherwise conflicting state laws will be preempted once this final FTC rule becomes effective. Stay tuned for more details once the final rule is published. Several legal challenges to the rule have already been filed despite the cheers from employees. In the interim, until this final rule becomes effective, state law governs the enforceability of noncompetes and enforceability decisions are very fact-based. Call your employment attorney if you have questions about existing agreements.
This post was updated with additional information on April 24, 2024 and May 10, 2024.
