Details Around the FTC’s Rule Banning Non-Compete Agreements

In April, the Federal Trade Commission (FTC) convened an open commission meeting, followed by a vote (3-2) in favor of a proposed final rule to ban non-compete agreements. This significant decision marks a major shift in labor regulations, with the potential impact an estimated 30 million American workers who are subject to a non-compete through a former or current employer. This number translates to 1 in 5 workers.

The rule as currently written prevents employers from requiring employees—including senior executives—to enter into a post-employment non-compete agreement. It also restricts employers from enforcing such agreements, invalidating those that were already in place. However, the rule does include exceptions for certain senior executives with already existing non-compete agreements.

Legal Challenges to the Final Rule

Barring a successful challenge, the rule is slated to go into effect on September 4, 2024. However, three legal challenges are currently in place, with pending motions that could enjoin it across the nation or on a more limited basis.

The three ongoing legal challenges to the rule are:

• Ryan LLC v. Federal Trade Commission (Northern District of Texas)
• Properties of the Villages, Inc. v. Federal Trade Commission (Middle District of Florida)
• ATS Tree Services, LLC v. Federal Trade Commission (Eastern District of Pennsylvania)

How It Started

The FTC issued a proposed rule at the start of 2023, adopting the stance that a non-compete clause is an unfair method of competition. It stated that such an agreement prevented workers from leaving jobs, lowered wages both for those who were and were not subject to it, and decreased competition.

Within the final rule, the ban applies to most employees, as well as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors providing a service to a client or customer.

Additional Requirements Under the Final Rule

The rule also requires employers to notify any parties currently subject to a non-compete, informing them that the agreement is now void and unenforceable. It’s important to note that the FTC has not banned non-solicitation or nondisclosure agreements.

Additionally, the exception for senior-level executives allows existing agreements to remain in effect. Employers may not require even executive-level team members to enter into new agreements.

Our friends at Wagner, Falconer, & Judd may be able to provide additional assistance to business owners looking for help with this and other corporate and business regulations.

This article should not be seen as legal advice. You should consult with an attorney before you rely on this information.