FTC Issues Final Rule Banning Non-Compete Agreements

By Samantha Halem, Tavish Brown, Samuel Gates   May 9, 2024

FTC Issues Final Rule Banning Non-Compete Agreements

What is Happening?

On April 24, 2024, the Federal Trade Commission (“FTC”) voted to adopt a final rule (available here) that, if it goes into effect, will ban nearly all non-compete agreements as “unfair methods of competition.” It would also ban any contractual term or workplace policy that would function as a non-compete. The final rule is expected to go into effect on September 4, 2024.1

The final rule follows recent FTC enforcement actions, legislative activity on the state and federal level (including recent state bans of non-compete agreements), and court decisions that reflect increasing hostility to non-compete agreements. But the rule is already facing legal challenges in the form of lawsuits contesting the FTC’s authority to promulgate such a rule, and there is mounting skepticism that the rule will ever go into effect. Regardless of the fate of the FTC’s final rule, Hirsch Roberts Weinstein anticipates that trending hostility toward non-compete agreements and other restrictive covenants will continue. Employers should therefore consult with counsel to assess their contractual terms, policies, and practices to confirm that they comply with applicable law while protecting the employer’s legitimate business interests.

Definition of Non-Compete and Other Key Terms

Under the final rule, a “non-compete” is defined as a “contractual term or workplace policy” that prohibits, penalizes, or functions to prevent a worker from (1) seeking or accepting post-employment work in the United States, or (2) operating a business in the United States after the conclusion of their employment. A “worker” is defined broadly to be any person who performs any work of any kind for any person, whether paid or unpaid.

What Does the Rule Prohibit?

The final rule contains separate provisions prohibiting non-competes for two subcategories of workers: (1) “senior executives” and (2) “workers other than senior executives.”

With respect to “workers other than senior executives,” the final rule would make it an “unfair method of competition” for an employer to:

  1. enter into or attempt to enter into a non-compete;
  2. enforce or attempt to enforce a non-compete; or
  3. represent that a worker is subject to a non-compete.

As to “senior executives,” it would make it an “unfair method of competition” for an employer to:

  1. enter into or attempt to enter into a non-compete;
  2. enforce or attempt to enforce a non-compete clause entered into after September 4, 2024; or
  3. represent that the senior executive is subject to a non-compete, where the non-compete was entered into after September 4, 2024.

Importantly, the final rule applies to post-employment restrictions. It does not prohibit restraints on competition during employment.

Who is a Senior Executive?

A “senior executive” is defined as a worker who has (1) “policy-making authority,” and who (2) receives total annual compensation of at least $151,164 (as defined by various tests).

“Policy-making authority” is “final authority” to make policy decisions that “control significant aspects” of a business and expressly does not include advising or exerting influence over policy decisions or final authority to make decisions only for subsidiaries or affiliates. The rule states that an entity’s president, chief executive officer, or the equivalent are senior executives.

While senior executives cannot be bound by non-competes entered into after September 4, 2024, non-competes for senior executives entered into before September 4, 2024, will remain enforceable.

What “Functions” as a Non-Compete?

As noted, the non-compete ban applies to any “contractual term or workplace policy.” This language is very broad. The final rule identifies several contractual terms and policies that would be deemed non-competes, including forfeiture-for-competition provisions, agreements requiring workers to pay liquidated damages for competing, and severance agreements in which payments are only made if the worker refrains from competing. The test also has the potential to apply in some cases to non-disclosure agreements, non-solicit agreements, and agreements requiring employees to repay expenses if they leave employment within a certain period.

It is important to note that virtually any agreement or policy may be deemed a non-compete under the ban if it restrains a worker’s post-employment work. While business-to-business agreements are not directly covered by the rule, businesses should be aware that such agreements may still violate antitrust law.

Exceptions to the Non-Compete Ban

The final rule contains several exceptions. Notably, the rule will not apply to bona fide sales of a business. More important for most employers, the rule does not apply to causes of action that occurred prior to September 4, 2024. It also is not a violation to enforce or attempt to enforce a non-compete, or to make representations about a non-compete, where there is a good-faith basis to believe that the rule does not apply.

Employers Must Notify Workers of Void Non-Competes

If the final rule goes into effect, employers must give “clear and conspicuous” notice to all workers subject to a non-compete by September 4, 2024, that their non-compete will not and cannot legally be enforced against the worker. The FTC has issued model forms in English and other languages that can be used to notify workers of any void noncompete, available here.

What About State Laws Permitting Non-Competes?

The final rule will preempt all state laws concerning non-competes. That means that regardless of whether non-competes are permitted under state law, if the final rule goes into effect they will be banned everywhere in the United States.

Is the Rule Retroactive?

Yes. However, as noted, the retroactivity of the rule would not apply to (1) senior executive non-competes entered into before September 4, 2024, and (2) causes of actions that accrued before September 4, 2024.

What Should Employers Do Now?

The FTC’s final rule is very broad and, despite pending legal challenges to the rule, employers would be wise to at least prepare for the possibility that it may go into effect. Of course, the rule is not currently in effect. Parties remain free to enter into non-compete agreements, if otherwise permitted by current law, and employers will be allowed to enforce non-competes where a violation occurred before September 4, 2024.

But in the interim, employers should assess their contractual terms and policies so that they can be at the ready to issue notices on or before September 4, 2024. This should include a review of existing non-disclosure agreements, non-solicitation agreements, no-hire/recruit agreements, and no-service agreements, and other restrictive covenants and restraints on post-employment conduct.

Employers also should determine whether any of their workers are “senior executives” as defined by the final rule. For those workers, being prepared to explain why an individual’s non-compete is not being voided will be essential. Employers should be aware that the final rule states that that they believe “less than 1%” of workers will qualify as senior executives.

Of course, employers should keep an eye on all future developments. As noted, several legal actions have already been brought seeking to enjoin and/or a declaration that the final rule is unconstitutional. Hirsch Roberts Weinstein will continue to monitor these actions.

Finally, as mentioned above, the legal landscape for post-employment non-competes is in flux nationwide. In addition to the FTC’s final rule, various states have passed new restrictions on non-compete agreements, from income thresholds to types of jobs where they are permissible, to total bans. The nuances of each jurisdictions’ laws are complicated. Hirsch Roberts Weinstein can work with you to develop lawful agreements and policies to protect your business.

For Questions/Compliance Assistance

If you have any questions about the FTC’s final rule banning nearly all non-competes and its potential impact on your business, please contact:

  • Tavish Brown (tbrown@hrwlawyers.com / 617-348-4366);
  • Sam Gates (sgates@hrwlawyers.com / 617-348-4346);
  • Samantha Halem (shalem@hwlawyers.com / 617-348-4300); or
  • Any member of the HRW Team.

1 The final rule does not go into effect until 120 days after it is published in the Federal Register. On April 30, 2024, the Federal Register announced that the final rule will be published in the Federal Register on May 7, 2024. Assuming the rule is published on May 7, 2024, the effective date would be September 4, 2024.

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