FTC Announces New Rule Banning Non-Compete Agreements
On April 23, 2024, the Federal Trade Commission (FTC) issued a new rule that bans non-competes for any individuals who provide work or services to a business or person. The rule makes entering or enforcing into a non-compete with an employee an “unfair method of competition” under Section 5 of the FTC Act. The rule is intended to promote competition, a free economy, and protect the “fundamental freedom of workers to change jobs.” The rule is slated to go into effect 120 days after the rule is published in the Federal Register.
Who Does the New FTC Rule Apply to?
The rule applies to all individuals who work for a for-profit employer, including any worker, whether paid or unpaid, whether they are classified as a W2 employee or a 1099 independent contractor. The ban only affects post-employment non-competes, meaning that employers can still require and enforce a non compete during the term of employment. Under the rule, although employers will be banned from entering into or enforcing non-competes with any workers, there is a carveout allowing enforcement of existing non-competes against workers classified as “senior executives.”
Is My Existing Non-Compete Agreement Enforceable Under the New FTC Rule?
Once the rule goes into effect, the only existing non-competes that will remain enforceable are those for “senior executives,” i.e., workers who both earn more than $151,164, annualized, and who have in a policy-making authority over the business. However, for all other workers, existing non-competes will be unenforceable under the new rule. Employers must also provide notice to its current or past workers that their existing non-competes cannot be enforced. If you are an individual with an existing non-compete agreement, or you operate a business holding a non-compete over your workers, it is crucial to understand that this new rule will impact your current contracts and your future agreements.
Can a Business Enforce New Non-Competes?
Although the rule prohibits non-competes for any workers, this only applies to natural persons. Consequently, non-competes can still be entered into between business entities (Corp., LLC, etc.) to stop the business itself from engaging in competitive activities. Additionally, there are exceptions allowing non-competes in connection with the bona fide sale of a business entity, a person’s ownership interest in the entity, or a sale of substantially all of the business’s assets.
Does the Rule Impact Other Restrictive Covenants?
No. The rule does not apply to other restrictive covenants often included in employment contracts to protect a company’s legitimate business interests, such as trade secrets, confidential information, and client relationships, by restricting certain activities during and after employment terminates. Some common restrictive covenants not impacted by the new FTC rule include (i) non-solicitation, (ii) non disclosure, (iii) non-disparagement, (iv) non-interference, and (v) confidentiality agreements.
What’s Next?
While the rule is slated to go into effect in more than 120 days, it is all but guaranteed that the rule will be heavily challenged in court by a number of employers and organizations. Within hours of the FTC’s announcement, the U.S. Chamber of Commerce filed suit against the FTC in a Texas federal court in an attempt to block the rule. As the employer-worker relationship radically changes, individuals and companies will have to evaluate how the new rule impacts themselves personally. Employees should be mindful that they will still be liable for breaches of a non-compete occurring prior to the rule taking effect. If you have any questions or concerns on how this FTC rule affects your business, contracts, or yourself individually, please feel free to reach out to our office and have a consultation with one of our attorneys.
