Federal Trade Commission Bans Non-Competes for Virtually All Workers Nationwide

Federal Trade Commission Bans Non-Competes for Virtually All Workers Nationwide
Posted by   Lorna Hebert May 1, 2024

As discussed in our prior article, the Federal Trade Commission (FTC) announced a proposed rule to ban non-compete agreements between most employers and employees nationwide. Subsequently, the FTC reviewed and considered over 26,000 comments to the proposed rule. On April 24, 2024, the FTC, in a 3-2 vote split along party lines, issued a final rule (Rule) which bans non-competes for nearly all workers throughout the United States. The Rule is scheduled to take effect 120 days after publication in the Federal Register.

Substance Of Rule
According to the Rule, it is an unfair method of competition:

  • With respect to a worker, other than a senior executive, (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that the worker is subject to a non-compete clause.
  • With respect to a senior executive, (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause entered into after the effective date of the Rule; or (iii) to represent that the senior executive is subject to a non-compete clause, where the noncompete clause was entered into after the effective date of the Rule.

“Worker” is defined in the Rule as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”  The term “worker” also includes a natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.

A “Senior Executive” is a worker who (1) was in a policy-making position and (2) received total annualized compensation of at least $151,164 (the 2025 salary threshold for a “highly compensated employee” under the Fair Labor Standards Act) in the preceding year (as defined in the Rule). To be in “a policy-making position,” a worker must (i) be the chief executive officer or president (or the equivalent) of a business entity, or (ii) have policy-making authority with respect to the business entity. “Policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy.”

Definition Of Non-Compete Clause
The Rule defines “non-compete clause” as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition. According to the Rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether oral or written (such as a provision in an employee handbook). “Employment” is defined as “work for a person.”  

Impact on Other Restrictive Covenants
Restrictive covenants such as non-disclosure agreements (NDAs) and non-solicitation agreements, as well as training repayment agreements, no-hire agreements, and no business agreements, are not categorically prohibited by the Rule. However, if a term or condition of any of these agreements is “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after [his/her] employment ends, such a term is a non-compete clause under the [Rule].” 

As examples, per the FTC, NDAs that bar a worker from disclosing, in a future job, any information that is “usable in’ or “relates to” the industry in which he/she works, or that bar a worker from disclosing any information or knowledge the worker may obtain during his/her employment whatsoever, including publicly available information, would be considered functional non-competes. Whether a restrictive covenant or other agreement rises to the level of a functional non-compete is to be determined on a case-by-case basis and a fact-specific inquiry.

Notice Requirement
Employers are required to provide “clear and conspicuous notice” to workers, other than senior executives, subject to a non-compete clause, that enforcing or attempting to force the non-compete clause will not be, and cannot be, enforced against the worker.

The notice must (1) identify the person who entered into the non-compete clause with the worker, and (2) be on paper delivered (a) by hand to the worker, (b) by mail at the worker’s last known personal street address, (c) by email at an email address belonging to the worker, including the worker’s work email address or last know personal email address, or (d) by text message at a mobile telephone number belonging to the worker. A model notice is included in the Rule.

Applicability of/Exceptions to the Rule
The Rules does not apply in the following instances:

  • Entities Not Covered by the Federal Trade Commission Act (FTC Act): The Rule does not apply to entities not covered by the FTC Act, such as certain non-profit organizations and industry specific entities, such as banks, savings and loan institutions, federal credit unions, certain common carriers, and persons subject to the Packers and Stockyards Act of 1921.
  • Sale of a Business: The Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
  • Prior Breach: The Rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. For example, an employer’s claim against a former employee for violation of a valid non-compete prior to the effective date of the Rule would remain viable under the Rule.
  • Good Faith Belief that Rule is Inapplicable: The Rule does not apply where an employer enforces or attempts to enforce a non-compete or makes representations about a non-compete where the employer has a good-faith basis to believe that the Rule is inapplicable. For instance, a non-profit organization’s good faith belief that it is not subject to the FTC Act would provide a defense to an enforcement action under the Rule.

Interaction with State Laws
The Rule preempts state laws that conflict with the Rule but does not limit or affect enforcement of state laws that are more restrictive. For example, a preexisting non-compete of a senior executive that would be enforceable under the Rule might not be enforceable under state law if the employer failed to comply with pertinent state law provisions requiring notice or garden leave.

Challenges to Rule’s Legality
The Rule has drawn criticism on multiple grounds, and legal challenges to it have already commenced, including a lawsuit filed by the U.S. Chamber of Commerce in the U.S. District Court for the Eastern District of Texas, Tyler Division, on April 24, 2024. The lawsuit seeks a declaratory judgment that the Rule is arbitrary and capricious, or otherwise contrary to the law within the meaning of the Administrative Procedures Act, an order vacating the Rule in its entirety, and an order permanently enjoining the FTC from enforcing the Rule. The court in this case or another case might issue a nationwide injunction precluding the Rule from taking effect pending a trial on the merits. In this scenario, the effective date of the Rule would not take effect for the foreseeable future.

Moving Forward
Employers should closely monitor developments regarding the Rule, including whether the Rule is enjoined, and, in the event the Rule does stand, the deadline for compliance. Employers who wish to be proactive may want to prepare for compliance with the Rule by taking steps such as:

  • conducting an inventory of their business protection agreements with current and former workers;
  • determining if any of the agreements include standard non-competes or functional non-competes;
  • identifying agreements involving senior executives;
  • compiling contact information for the affected workers who would need to receive the required notice of non-enforcement;
  • evaluating whether or not to have senior executive(s) sign a non-compete prior to the effective date of the Rule, and
  • reviewing their restrictive covenants, such as NDAs and customer non-solicitation, no-hire, and no-business provisions to ensure that they are narrowly tailored and no broader than is reasonably necessary to protect the employer’s legitimate business interests.

We will continue to monitor developments related to the FTC’s Rule and provide updates as appropriate. In the meantime, if you have any questions, please contact Lorna Hebert at [email protected].

Lorna Hebert is an employment, labor, higher education, and litigation attorney with nearly 30 years of experience handling a broad range of complex employment and labor matters. Lorna advises clients on a wide range of employment matters, including workplace investigations, dispute resolution, hiring, performance management, discipline, terminations, reorganizations,  accommodations, employee benefits, wage and hour issues,  discrimination claims, policies and procedures, and training.

This publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances not an offer to represent you. It is not intended to create, and receipt does not constitute, an attorney-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal questions you may have. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.

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