New FTC Rule on Noncompete Agreements
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that bans noncompete clauses in specific employment contracts, categorizing them as an unfair competitive practice. This ban specifically targets post-employment restrictions, meaning it limits what an employee can do after leaving a job. It does not affect in-term restraints, which govern an employee's actions during their tenure with an employer.
This rule, effective 120 days following its publication in the Federal Register, prohibits most noncompete agreements, marking a significant shift in employment law that aims to enhance labor market mobility and competition.
There have already been several lawsuit filed challenging the FTC’s authority to enforce this rule which could take years to work their way through the courts. However, employers should prepare to comply unless and until a court decides otherwise. Non-compliance could lead to civil penalties or injunctions.
Key Provisions of the Rule:
From the effective date,
employers must avoid entering into noncompete agreements with new or existing employees;
all pre-existing noncompete clauses become unenforceable for employees not classified as “senior executives;” and
employers are required to notify affected employees that their noncompete agreements will no longer be enforceable, using model language provided by the FTC.
The final rule does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause accrued prior to the effective date of the final rule.
This federal rule preempts conflicting state laws, but does not interfere with any state law that offers greater protections to employees.
Exemptions
Senior Executives: Existing noncompete clauses will still be enforceable for senior executives who were in a policy-making position and whose annual compensation met or exceeded $151,164 at the time of agreement. However, employers are banned from entering into or attempting to enforce any new noncompetes with senior executives.
Other Exemptions: The rule does not apply to noncompete clauses entered into by a person pursuant to a bona fide sale of a business entity or to entities that the FTC customarily does not have jurisdiction over, such as non-profit organizations and banks, savings and loan institutions, and federal credit unions.
Other Restrictive Agreements
The rule does not ban other types of employment restrictions, such as trade secret laws, confidentiality, non-disclosure agreements (NDAs), and customer and employee non-solicitation agreements.
Employers should be aware that these types of agreements could be scrutinized if they effectively function as noncompete clauses.
“Garden leave” agreements whereby an employee remains employed and continues to receive the same salary and benefits, even if not actively working, will remain permissible.
Action Steps for Employers
Review Employment Contracts: Review all existing employment documents to identify any noncompete clauses.
Issue Notices for Non-Exempt Workers: Prepare and send out notices to non-exempt workers with noncompete clauses, using the FTC's model language as a guide, before the rule takes effect.
Evaluate Compensation Agreements for Executives: Check agreements with executive-level employees to see if they meet the FTC's criteria for "senior executive," whose noncompete clauses may still be enforceable.
The Stein Adler Employment Law team is here to assist you in understanding these new regulations and implementing the necessary changes effectively. If you have questions or concerns about the new FTC regulations, please contact Jonathan Adler, Casey Hail, or Melanie Sarver.