On April 23, 2024, the Federal Trade Commission issued a new rule banning most noncompete clauses in employment contracts (the “Rule”).
The Rule makes almost all existing noncompete agreements (with very narrow exceptions) unenforceable and prohibits employers from entering into new non-competes with any employee.
The Rule becomes effective 120 days following its publication in the Federal Register, although legal challenges to the Rule are anticipated, and at least one challenge to the Rule has already been filed.
All current state laws limiting noncompetes are preempted by the Rule unless the state law provides greater worker protection than the Rule.
Rule Highlights:
- “Noncompete clause” is defined as a contractual term that limits an employee from working for a competing employer or starting a competing business within a certain geographic area and for a specified period of time after the employee’s employment ends.
- New post-employment non-compete agreements between employer and employee are banned, regardless of industry or type of worker, including senior executives, after the effective date of the Rule.
- Existing post-employment non-compete agreements between employer and employee are permitted, but only for senior executives. “Senior executives” are “workers earning more than $151,164 annually who are in a policy-making position.”
- Existing post-employment non-compete agreements between employer and employee, other than for senior executives, are void as of the effective date.
- A non-compete arising from a “bona fide” sale of a business remains exempt from the ban on non-competes. A “bona fide” sale of a business includes the sale of a business entity, or a person’s ownership interest in a business entity, or all or substantially all of an entity’s assets.
- The Rule is not retroactive, and only applies to violations occurring as of the effective date of the Rule.
Notice Requirement
The Rule requires notice to be given to current and past employees that post-employment non-compete agreements are no longer enforceable.
The required Notice must be given:
- By the effective date of the Rule,
- To each person that entered into a non-compete, and
- Advising them that the non-compete clause will not be enforced.
The Notice must:
- Identify the employer who entered into the non-compete agreement with the employee, and
- Be delivered by hand, mail , email or text message to the employee’s last known contact information.
Model language of the Notice to Employees has been published by the FTC and can be found HERE
The Rule applies only to post-employment non-compete agreements and does not apply to non-competes that prohibit an employee from competing against the employer during their employment.
Although the Rule does not explicitly invalidate other restrictive covenants, such as nonsolicitation and nondisclosure clauses, such clauses that appear to limit the employee’s ability to work for a competing employer or start a competing business can still fall within the purview of the Rule. Notwithstanding the Rule, an employer can still protect its confidential information through confidentiality agreements and applicable trade secret laws.
Next Steps for Employers
Employers should take steps to review all non-compete and other restrictive covenant agreements, or similar provisions within other agreements, and prepare to comply with the Notice process prior to the effective date of the Rule.
Employers are encouraged to contact experienced employment counsel to help ensure timely compliance with the Rule.
In the meantime, we will continue to monitor litigation and other legal challenges to the Rule and will keep you informed.
Additional Resources:
