CareersOn April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to issue a final nationwide rule banning noncompete agreements In doing so, the FTC plans to remove a vital tool used by businesses to reasonably prevent employees from unfairly competing with their employers after their employment ends.
In the rule, the FTC asserts it has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into non-competes with workers and to enforce certain non-competes. However, the FTC’s authority to implement the Rule, and its reasoning for doing so, are sure to face legal challenges. Indeed, on April 24, 2024, the US Chamber of Commerce filed a lawsuit challenging the Rule. It remains to be seen if the Rule will survive such challenges and employers should begin preparing now in anticipation of the rule going into effect.
In simple terms the rule prohibits non-competes for the vast majority of workers and that all existing noncompete agreements will no longer be enforceable once the rule becomes effective (with the exception of existing non-competes for senior executives, which shall remain enforceable). The rule will take effect 120 days after its publication in the Federal Register.
After the effective date, employers will be banned from entering into new non-competes (even if they involve senior executives). The rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. However, the rule will not apply to non-competes entered into in connection with the sale of a business, existing non-compete lawsuits, or franchisee/franchisor contracts. Further, the Rule does not prevent employers from prohibiting employees from engaging in competitive activities during their employment, only post-termination non-competition.
Prior to the effective date, employers will be required to issue clear and conspicuous, written notice to employees with non-compete agreements that their non-compete clause will not be and cannot be legally enforced against them.
Companies that violate the rule may be subject to civil penalties.
Walter Haverfiled will continue to monitor developments related to the rule and is here to answer employer questions about the rule and its potential impact on business.
Jessica L. MacKeigan is senior counsel at Walter Haverfield who frequently represents employers in labor law and employment matters. She can be reached at jmackeigan@walterhav.com or 216.928.2928.