On April 23, 2024, the Federal Trade Commission (FTC) issued a groundbreaking final rule classifying non-compete clauses as a violation of Section 5 of the FTC Act, effectively banning most non-compete clauses for workers nationwide. This rule aims to foster a more competitive labor market but is expected to face legal challenges that may delay or prevent its implementation.

What Constitutes a Violation?

The final rule stipulates that non-compete clauses will violate Section 5 if they are either:

• Contractual.
• Part of a written or oral workplace policy.

This means that any agreement or policy that restricts a worker’s ability to compete with their employer will likely be deemed unlawful.

FTC’s Rationale and Expected Benefits

The FTC anticipates that banning non-competes will lead to several significant benefits, including:

• Lowered Healthcare Costs: Increased job mobility may lead to more competitive health insurance options.
• Creation of New Businesses: Entrepreneurs will have greater freedom to start new ventures without fear of legal repercussions.
• Increased Innovation: With fewer restrictions, employees can contribute to innovative projects and ideas.
• Better Compensation: Workers will have more leverage to negotiate higher salaries and benefits.

Protections for Employers

Employers concerned about protecting trade secrets and other confidential information can still utilize alternatives such as non-disclosure agreements (NDAs). These agreements provide a means to safeguard proprietary information without restricting an employee’s future employment opportunities.

Implementation and Application

The new rule will take effect 120 days after its publication in the Federal Register. After this date:

• Most existing non-compete agreements will become unenforceable.
• The rule does not apply to existing non-competes with senior executives, though employers cannot enter into or enforce new non-competes with them.

The FTC reasons that senior executives are less likely to suffer the harms typically associated with non-competes, and credible concerns were raised about banning these agreements for senior leadership.

Requirements for Employers

Employers must notify relevant workers that non-compete agreements are no longer enforceable after the effective date. The FTC provides model language to satisfy this notice requirement.

Exceptions and Preemptions

The final rule does not apply to non-compete agreements:

• Entered into as part of a bona fide sale of a business entity.
• Where a non-compete cause of action accrued before the effective date.
• Where there is a good-faith basis to believe the rule is inapplicable.

State non-compete laws that do not conflict with the final rule remain enforceable. However, the rule preempts any state laws that conflict with it.

Guidance for Excluded Entities

The new rule applies only to entities and individuals subject to the FTC Act. This excludes entities such as non-profits, banks, credit unions, and common carriers, among others (15 U.S.C. §45(a)(2)). These organizations should consult with counsel to understand their obligations and the extent of the FTC’s authority in enforcing the rule.

Severability Clause

If any portion of the final rule is rendered invalid or unenforceable by a court, the remainder of the rule will remain in effect. This ensures that the core provisions of the rule will still apply even if parts are struck down.

Conclusion

The FTC’s new rule on non-compete clauses represents a significant shift in employment law, aiming to promote a more dynamic and competitive labor market. Businesses should review their current non-compete agreements and consult with legal counsel to ensure compliance and explore alternative measures to protect their interests.

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