FTC Bans Most Noncompete Agreements

This past week the Federal Trade Commission “FTC” passed a Rule, which will ban most noncompete agreements in employment contracts, if it becomes effective in September, 2024 as presently planned.  The Rule will significantly impact businesses and workers should it become effective, as there are close to 30 million workers in the U.S. who are subject to noncompete agreements.   

The Rule is scheduled to go into effect 120 days after May 7, 2024, which is its scheduled date for publication in the Federal Register.  Note that the U.S. Chamber of Commerce has filed a federal lawsuit in Texas challenging the authority of the FTC to take this action.   Other business groups have also filed lawsuits challenging the Rule.  

What does this Rule cover?

When it becomes effective, the Rule will prevent employers from enforcing existing noncompete agreements with workers, other than Senior Executives. Workers who are not “Senior Executives” include full-time or part-time employees as well as independent contractors, volunteers, and interns.   A Senior Executive is defined as a worker who earns more than $151,164 in compensation (not including benefits) per year and is also in a “policymaking” position. Existing agreements with Senior Executives may be enforced through the term of any existing agreements.

Employers may not enter into any new noncompete agreements, including with Senior Executives, once the Rule takes effect.

What does the Rule NOT cover?

There is an exception which allows noncompete agreements as part of a bona fide sale of a business, so long as the seller has an opportunity to negotiate the terms of the transaction.  A noncompete provision, as part of the sale of a business can only cover the individual seller of the business, not any employees of that business.

Certain businesses will not be subject to the Rule because they are not subject to the FTC’s authority.  These include banks and other financial institutions, common carriers, air carriers and certain non-profit organizations.

What must a business owner do?

Once the Rule goes into effect, a business owner must determine whether it is subject to the Rule, and if it is, it must cease enforcement of noncomplete agreements, and notify current and former employees that any existing agreements are no longer enforceable, subject to the limited enforcement exception for Senior Executives.     

If you are the owner of a business that does not have any existing noncompete agreements in place, there is nothing you are required to do.    Business owners that are subject to the Rule may not enter into any non-complete agreements in the future, including with Senior Executives, once the Rule is effective. 

It is essential for business owners to understand and comply with the new Rule to avoid legal repercussions. However, as noted above, there are pending challenges to the FTC’s authority to implement the Rule’s, such as the lawsuit filed by the U.S. Chamber of Commerce, which could potentially impact its implementation or enforcement. We will be following these challenges as they progress.

For more information and questions regarding the noncompete ban, please reach out to the employment law team at Parrett Porto:  Louis M. Federici, Jennifer Rignoli, Sandra Smith, Kay Wilson.