On April 23, 2024, the Federal Trade Commission (FTC) issued a new rule banning non-compete agreements in employment settings. The rule has been in the making for over a year.
Non-competes are agreements that prevent an employee from leaving and going to work for a “competitor.” Often the scope of what constitutes a “competitor” is broad enough to seriously limit an employee’s ability to earn a living anywhere other than with their current employer. Employers may worry that an employee learns valuable information at their company, then jumps ship, using it to the employer’s detriment at another company or by starting up their own business doing the same thing.
No new non-compete agreements may be entered into or enforced after the effective date of the new rule, which will be 120 days after the rule is published in the Federal Register. Publication will probably happen in the coming week.
Existing non-competes remain in force, but only until they expire on their own terms and only for senior executives. Senior executives are defined as employees who are in policy-making positions and who earn more than $151,614 per year. After the new rule takes effect, it will also be unlawful to extend or renew an existing non-compete with a senior executive.
Employers must send written notice by the new rule’s effective date to all affected employees that the worker’s non-compete “will not be, and cannot legally be, enforced.”
The FTC noted that most employees who are subject to non-competes have also signed non-disclosure agreements (NDAs). The FTC felt that NDAs and trade secrets laws adequately protect employers. I would note, though, that non-competes (being black and white) are easier to enforce than the more nuanced NDA and trade secrets claims.
Litigation is expected that may – or may not – delay the effective date. Everyone should act on the assumption that the rule will take effect on time unless and until there is a court ruling to the contrary.
Non-competes will still be permitted between buyers and sellers of businesses. That is an entirely different use for non-competes. The FTC was not bothered by non-competes in that context because it is the result of negotiation between two businesses of relatively equal bargaining power. In the employment setting, bargaining power is often one-sided.