FTC bans noncompete agreements

The Federal Trade Commission (FTC) issued its final rule on April 23 banning virtually all noncompete agreements covering workers in the United States. Absent a successful court challenge, the rule will go into effect Sept. 4, 2024.  

Under the new rule, and subject to a few narrow exceptions, companies are banned from entering into new noncompete agreements and enforcing noncompete agreements currently in effect with all workers.  

The definition of “worker” is broad and includes not only employees but also independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. The definition of “worker” does not include a franchisee in the context of a franchisee-franchisor relationship.  

A noncompete agreement is defined as an agreement that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work with another person after the end of employment or (ii) operating a business after the conclusion of employment.  

The final rule provides that the use of noncompete agreements is an “unfair method of competition” that violates Section 5 of the FTC Act. Violations of the FTC Act can result in fines, penalties, and other injunctive relief.  

Existing noncompete agreements with workers other than senior executives will no longer be enforceable under the new rule. Employers will not be required to rescind these agreements but will be required to notify affected workers that the agreements are no longer enforceable.   

For senior executives, defined as earning over $151,164 a year and in policy-making positions, existing noncompete agreements can remain in force.  However, no new noncompete agreements can be entered into or enforced.     

Recognizing concerns of employers, the FTC recommends firms protect their investments without noncompete agreements in place by using trade secret laws and non-disclosure agreements.  

Because the FTC’s authority only extends to for-profit businesses, the final rule will not affect employment agreements entered into by workers employed by nonprofit organizations.  

Noncompete agreements ancillary to the sale of a business are still permitted.  

It is anticipated that this final rule will be subject to numerous legal challenges. The U.S. Chamber of Commerce has already filed a lawsuit seeking to strike down this ban in the U.S. District Court for the Eastern District of Texas, Chamber of Commerce of the United States of America v. Federal Trade Commission.