On April 23, 2024, the Federal Trade Commission (FTC) approved a rule banning employers from enforcing non-compete agreements for all workers, including employees and independent contractors, with limited exceptions. This new rule, set to take effect on September 4, 2024, is already facing legal challenges that could delay or overturn its implementation.
What Are Non-Compete Clauses and Why Is the FTC Involved?
Non-compete clauses prevent workers from seeking employment with competitors or starting similar businesses after leaving a job. The FTC considers these clauses to be unfair competition, which it has the authority to regulate under the Federal Trade Commission Act.
What Does the New Rule Entail?
- Prohibition on New Non-Competes: Starting from the effective date, employers cannot enter into non-compete agreements with workers.
- Invalidation of Existing Non-Competes: Employers must void existing non-competes and inform affected workers that these agreements will no longer be enforced.
Are There Exceptions?
Yes, the rule provides several exceptions:
- Senior Executives: Non-competes with senior executives earning more than $151,164 annually and holding policy-making positions are not banned.
- Bona Fide Business Sales: Non-competes related to the genuine sale of a business or ownership interests are not impacted.
- Existing Legal Actions: Causes of action related to non-competes before the effective date are not affected.
- Industry-Specific Exemptions: Banks, federal credit unions, common carriers, and entities under the Packers and Stockyards Act are exempt.
Does the Rule Cover Only Non-Competes?
Primarily, but it also applies to other policy or contract provisions if they effectively function as non-competes, such as overly broad confidentiality or non-solicitation agreements, or punish workers for taking on a new job, such as excessive training cost reimbursement agreements.
Legal Challenges and Potential Delays
At least three lawsuits have been filed against the FTC, challenging the rule’s legality and seeking to delay its enforcement:
- Ryan, LLC v. FTC: Filed in Texas.
- ATS Tree Services, LLC v. FTC: Filed in Pennsylvania.
- Chamber of Commerce v. FTC: Filed in Texas, requesting a preliminary injunction.
The main arguments are that the FTC overstepped its authority, the rule represents an unconstitutional delegation of legislative power, and the rule is arbitrary and capricious. A decision on the motion to stay in the Ryan case is expected by July 3, 2024.
Steps for Employers
Employers should monitor these legal developments closely. If the rule appears likely to take effect, they should prepare to notify workers with existing non-competes using the FTC’s model notice language, delivered via hand, mail, email, or text.
For further updates and guidance, employers should stay informed through legal advisories and professional consultations.
