On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that bans non-compete agreements nationwide. The final rule will become effective 120 days after publication in the Federal Register. Under the final rule, which survived by a single vote, employers will be prohibited from entering into or attempting to enforce any non-compete agreements, either with workers or senior executives, once the final rule takes effect.
Regarding existing non-competes, only those agreements with senior executives will remain enforceable. Employers will also be required to notify workers (other than senior executives) who are subject to existing non-competes that those agreements are no longer enforceable.
However, before employers make any changes to their restrictive covenants, they should be advised that given the final rule's potentially seismic impact on post-employment restrictions across the nation, we fully expect to see it quickly challenged in court.
Aside from the general provisions of the final rule discussed above, the impact of the final rule is magnified by its broad definitions of certain key terms that expand its reach. For example:
- The term "workers" covers all current and former workers, regardless of their title or status under any other applicable law, and regardless of which entity hired or contracted them to work. Therefore, the term "worker" also applies to independent contractors and other individuals who fall outside of the employer-employee relationship.
- The term "senior executives" covers workers in policy-making positions who earn more than $151,164 annually. Workers who do not meet both of those requirements (i.e., the nature of their position and the compensation threshold) will not be considered "senior executives" under the final rule. Importantly, if the individual is not a "senior executive," their current non-compete will be considered unenforceable as of the final rule's effective date.
- Lastly, the final rule defines a "non-compete" broadly as a term or condition of employment that either "prohibits," "penalizes," or "functions to prevent" a worker from (1) seeking or accepting post-employment work in the United States with a different person; or (2) operating a business in the United States after the conclusion of their employment/engagement. Under the current definition of a non-compete, any terms that require a worker to pay a penalty or forgo benefits or compensation as a result of competitive work are also unlawful. Regarding the "functions to prevent" portion of the definition, the FTC has already indicated that an overly broad non-disclosure agreement (NDA) could be considered a non-compete under the final rule where the NDA covers such a large scope of information that it functionally prevents any competitive work.
Many jurisdictions, like New York, are already skeptical of non-competes generally and have grown increasingly hostile to overly broad non-competes; but the final rule, if upheld, will certainly force employers in New York and throughout the United States to greatly refine their post-employment agreements and find new methods to protect their interests.
The final rule is new, and additional guidance concerning its application may be forthcoming. Employers should follow any developments concerning the final rule closely and begin to consider how to revise their post-employment agreements and provide notice to employees subject to potentially unenforceable non-competes should the final rule become effective and survive any legal challenges.
For reference and/or further reading, the final rule may be accessed here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.