More than a year after the Federal Trade Commission proposed a game-changing nationwide ban on noncompete agreements, the agency yesterday issued its final rule for implementing the ban. The prohibition, which is slated to go into effect later this summer, is estimated to impact 30 million American workers (roughly 18% of the workforce).

In announcing its final rule, the FTC claimed that the elimination of noncompetes — employment clauses and agreements that the agency considers to be an unfair method of competition and, as such, unlawful — will result in greater innovation, more business startups, and higher wages nationwide.

What’s included in the final rule

The nationwide ban goes into effect on August 21, 2024, and includes the following key provisions:

• Employers are prohibited from entering into, or attempting to enter into, a non-compete agreement with workers. Additionally, employers may not represent, imply, or suggest to any worker that they are subject to a non-compete.
• Employers are prohibited from enforcing an existing non-compete clause with any worker who is not classified as a senior executive. Additionally, employers must notify workers with existing non-competes that their agreements will not and cannot be enforced against them in the future. The FTC provides model notification language as well as directions on how provide such notice.
• Employers are permitted to enforce existing non-competes — that is, agreements entered into prior to August 21, 2024 — with “senior executives.” The final rule defines a senior executive as a worker who: (1) is in a policy-making position; and (2) received total annual compensation of at least $151,164 based on three types of calculation methods. Currently, less than 1% of workers nationwide meet this criteria.
• The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business.
• The final rule does not limit or affect enforcement of state laws that restrict noncompetes where the state laws do not conflict with the final rule, but it does preempt state laws that conflict with the final rule. It should be noted that, except in limited circumstances, Oklahoma law prohibits non-compete agreements.

Key definitions

To provide an added level of clarity to employers, the final rule provides definitions as well as examples of key terms.

• “Non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” Such a clause is prohibited whether it is in an agreement or policy, whether written or oral.
• “Prohibits” applies to terms and conditions that expressly ban a worker from seeking or accepting other work or starting a business after their employment ends. Examples of such agreements would be a contractual term between a national sandwich shop chain and its workers stating that, for two years after the worker leaves their job, they cannot work for another sandwich shop within three miles of any of the chain’s locations, or a contractual term between a steelmaker and one of its executives prohibiting the executive from working for any competing business anywhere in the world for one year after the end of the executive’s employment.
• “Penalizes” applies to terms and conditions that require a worker to pay a penalty for seeking or accepting other work or starting a business after their employment ends. One example is an agreement stating that, for two years after the worker’s employment ends, the worker may not engage in any business within a certain geographic area that competes with the employer unless the worker pays the employer liquidated damages of $50,000.

Rule’s impact on other restrictive covenants

While the FTC’s final rule attempted to clearly define the parameters of noncompetes, many were left wondering, whether the phrase “functions to prevent a worker from” could be considered broad enough to eliminate the use of non-solicitation clauses — that is, clauses that prohibit an individual from soliciting the clients, customers, or employees of a former employer. To this, the FTC clarified that this prong of the definition does not categorically prohibit other types of restrictive employment agreements, such as non-disclosure agreements (NDAs) and non-solicitation agreements. These types of agreements do not by their terms prohibit a worker from or penalize a worker for seeking or accepting other work or starting a business after they leave their job, and in many instances may not have that functional effect, either. However, the FTC cautions that if a non-solicitation clause is so broad or onerous that it has the same functional effect of a prohibited non-compete, then it would be covered by the final rule.

Timely next steps for employers

What are employers with non-compete agreements and non-solicitation agreements to do in light of this final rule? First, they should be on the lookout for any new developments impacting the timing or implementation of this new ban. McAfee & Taft’s Labor & Employment Group will continue to follow this closely, as we anticipate that this rule will be subject to a significant amount of litigation and that it is likely that all or part of this rule could be enjoined or struck down. However, given that the stated deadline is less than four months away, employers should start the process to comply in the event the rule goes into effect.

So, starting now, employers should review all existing employee clauses, policies, and agreements to determine which ones may be affected. Oklahoma employers, in particular, should review whether the narrow non-solicitation agreements that comply with Oklahoma law may run afoul of the new federal rule. Employers should then work with counsel to determine how to notify employees that previous agreements are no longer enforceable. Finally, employers should work with counsel to determine what options remain available to them to protect their legitimate business interests and prevent unfair competition.