FTC Issues Final Rule to Ban Noncompetes

collage with FTC and noncompete contract

May 15, 2024

On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a final rule that imposes a nationwide ban on all employers from using noncompete clauses in contracts with all workers at any level. There are limited exceptions: (1) it does not apply to existing noncompete agreements for senior executives (those in policy-making positions who earn more than about $151,164 annually); and (2) noncompete agreements are allowed if associated with a bona fide sale of a business.

The vote was 3-2, with Commissioners in favor saying that noncompete clauses impose unfair contractual terms on workers, suppress wages, and hinder innovation. Those opposed questioned whether the FTC had the statutory authority to promulgate the rule and raised concerns about its broad scope.

Several lawsuits have already been filed to stop the Rule’s implementation, including one by the Chamber of Commerce, which is seeking declaratory and injunctive relief in the United States District Court for the Eastern District of Texas.

Rule Highlights

The Rule takes effect 120 days after publication in the Federal Register.  As of May 14, 2024, the Rule has not been published. According to the FTC, however, the Final Rule’s expected effective date is September 4, 2024.

  • The Rule requires employers to actively inform workers (other than exempted senior executives) that any noncompete agreements are no longer in effect. 
  • The Rule includes model language that employers can use to communicate to workers. An “employer” includes partnerships, corporations, associations or other legal entities, and any natural person. 
  • The Rule’s definition of “worker” is broad and appears to include independent contractors.
  • Employers who operate as nonprofits or banks are technically exempt from the Rule, but the FTC has signaled that it could still review noncompete practices by such entities.
  • The Rule has a conditional state preemption provision. 
  • The Rule supersedes state laws to the extent that a state’s laws (1) permit or authorize conduct prohibited under the Rule; or (2) conflict with the Final Rule’s notice requirements.

Next Steps

It may take a while for the Rule to be resolved through the courts. Still, employers and other interested persons should begin to prepare for the Rule’s implementation, including: 
 

  • Review of the Rule’s requirements, with special attention to the definitions used for “senior executives,” “employers,” “worker,” “non-compete clauses” and “de facto noncompete clauses.”
  • Determine which individuals will qualify as “senior executives.” 
  • Review existing contracts for the existence of noncompete clauses.
  • Notify employees about their respective noncompete clauses no longer being in effect. There are specific procedures that must be followed. 
  • Keep apprised of state laws on noncompetes. Many states have already enacted, or are considering, measures to limit or prohibit noncompete clauses. 
  • Seek advice of a legal professional on actions needed to comply the Rule and/or applicable state law.

Additional Resources

FTC news release

Chart of states with noncompete laws and legislation under consideration

Overview of CA non-compete law