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April 25, 2024
FTC Bans Most New Post Employment Noncompete Agreements
On April 23, 2024, the U.S. Federal Trade Commission (FTC) today issued a final rule banning most new noncompete clauses in employment contracts and rendering all existing noncompete agreements unenforceable. The new rule also requires employers to notify their current and former employees that their non-compete clauses are void. Excepted from the new rule are non-competes covering “senior executives,” the sale of a business and franchisee/franchisor contracts. The new rule does not apply to non-profit corporations, banks, credit unions, air carriers and other entities that are outside of the FTC’s jurisdiction. The ban extends to all contract provisions that create “functional non-compete clauses” meaning those provisions that have the effect of prohibiting workers from accepting other employment. Given this broad definition, a non-disclosure agreement that limits a worker's mobility may also be banned.
The FTC defines “senior executives” to mean workers in policy making positions earning more than $151,164 annually. The new rule defines “non-compete clause” to mean those terms that preclude a worker from working for a competitor or starting a competing business within a certain geographic area for a set period of time. The new rule will pre-empt all current state laws limiting noncompete agreements unless the state law provides greater worker protection. The new rule becomes effective 120 days after its publication in the Federal Register, which has yet to occur. Employers who violate the rule will be subject to civil penalties, fines and injunctive relief.
The FTC’s rationale for the ban is premised on the belief that non-compete clauses suppress wages and harm competition by blocking workers from pursuing better opportunities and depriving businesses of a talent pool to help them expand. Garden leave clauses (which place a worker on paid leave) are likely to be permitted under the new rule, but the rule is silent as to the same, so employers should consult with counsel to review their garden leave clauses in this new environment.
Within 24 hours of the FTC issuing this ban on noncompete agreements, business groups led by the U.S. Chamber of Commerce sued the FTC. The lawsuit seeks a nationwide injunction stopping the final rule from taking effect while the litigation is pending.
Employers should not wait until the courts adjudicate the future of the FTC’s rule to assess their non- compete agreements and confidential information and trade secret covenants. Throughout the country, the legal trend has been to place greater limitations on restrictive covenants. Regardless of the outcome of this particular rule, the legal landscape for non-competes is changing and employers need to be prepared for those changes. Our team of employment attorneys at Hill Wallack stand ready to guide employers through these changing times. For questions, please contact: Susan L. Swatski, Esq. sswatski@hillwallack.com; David J. Truelove, Esq. dtruelove@hillwallack.com; and Suzanne M. Marasco, Esq. smarasco@hillwallack.com.
