In a seismic decision on April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to ban noncompete agreements for all workers, with a narrow exception for senior executives. This new rule, set forth in a 570-page action summary, is scheduled to take effect in just 120 days. Opponents of the rule, including industry groups such as the Chamber of Commerce, say it will violently disrupt longstanding employment practices and pose unprecedented challenges to businesses across all sectors. While proponents of the rule, including the AFL-CIO, claim that it will result in greater employee mobility and higher wages. Regardless of politics, this extraordinary legal development has sent shockwaves through the business community, triggering a vigorous debate about its potential ramifications.
The FTC’s ruling renders existing noncompete agreements unenforceable for the vast majority of workers, leaving only a minute fraction exempted under the “senior executive” category, comprising less than 0.75% of the workforce. Under the new rule, businesses are barred from entering into or enforcing noncompete agreements, except for pre-existing noncompete agreements with employees classified as senior executives. Senior executives are defined as individuals earning over $151,164 annually who occupy policy-making positions.
The new rule also includes a “bona fide sales of business” exception. This means that the ban will not apply to a noncompete clause entered into by a person selling a business, whether the transaction is a stock or asset purchase.
Additionally, the final rule does not outright ban non-solicitation clauses unless they meet the rule’s definition of a noncompete clause. Specifically, non-solicitation agreements can fall under the definition of a noncompete clause if they effectively prevent a worker from seeking or accepting other employment or starting a business after their current employment ends. Similarly, no blanket prohibition exists on confidentiality agreements designed to protect confidential and proprietary information, such as nondisclosure agreements (NDAs) and similar contracts. However, the rule states that NDAs may be considered unenforceable noncompetes if they encompass such a broad range of information that they effectively hinder workers from seeking or accepting alternative employment or embarking on entrepreneurial endeavors after leaving their current job.
To ensure strict compliance with the new rule, employers are required to send a written notice to each employee who signed a noncompete agreement, advising them that their noncompete agreement is unlawful and unenforceable and stating that they are free to accept a job with any other employer, including a competitor.
As advocates for employers and management, we recognize the vital role that noncompetes play in preserving customer goodwill and protecting trade secrets. In our experience, these agreements are often essential tools for ensuring the sustainability of operations and protecting legitimate business interests. That being said, the fact that the FTC’s ban is retroactive is especially bad news for countless employers who have already provided substantial compensation to employees in exchange for their agreement to be legally bound by a noncompete agreement. Several business organizations have promised to commence litigation challenging the FTC’s rule as unconstitutional, and the outcome of these lawsuits is far from certain.
