The Federal Trade Commission’s Final Rule Banning Non-Competes

On April 23, 2024, the Federal Trade Commission (the “FTC”) announced its final rule (the “Rule”) banning non-compete agreements for workers in the United States, with only limited exceptions.  The Rule’s effective date is 120 days after its publication in the Federal Register.  However, legal challenges brought by pro-business groups almost immediately after the announcement of the Rule could delay or prevent its enforcement.

What is a Non-Compete?

Section 910.1 of the Rule defines “non-compete clause” broadly as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work or operating a business after the end of employment.  Non-solicitation clauses are not covered by the Rule unless they are overbroad and function to prevent a worker from seeking or accepting other work or starting a new business after employment ends such that they function like a non-compete.

To Which Workers does the Rule Apply?

“Worker” is defined broadly and includes “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.”  Thus, the Rule may not only include employees on payroll but also consultants or other providers of services who work as independent contractors.  While the Rule will not cover franchisees, it may cover their employees.

To Which Non-Competes does the Rule Apply?

The Rule bans new non-competes with all workers entered into on or after the Rule’s effective date.  Existing non-competes, entered into before the Rule’s effective date with senior executives, can remain in force while those for other workers will become unenforceable.  The Rule defines “senior executive” as a worker earning more than $151,164 per year who is in a “policy-making position.”  A “policy-making position” means the president, chief executive officer or the equivalent, any other officer of a business entity or any other individual who has “policy making authority” for the business entity.  “Policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise,” but it does not cover a person whose role is limited to advising or influencing such decisions.

Are There Exceptions to the Rule?

The Rule does not apply to a non-compete agreement entered into in connection with the “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.”  In addition, the Rule does not apply if a covered worker violated an existing non-compete before the effective date of the Rule.

What Should Employers Do?

Under the Rule, employers must provide clear and conspicuous notice to relevant workers by the effective date of the Rule that their non-compete clauses will not be, and cannot legally be, enforced against them.  The Rule provides model language for such notices that can be used by employers for this purpose.

Given that the Rule has not yet been published in the Federal Register and that its effective date may be delayed due to the legal challenges, we do not recommend providing notices to employees immediately, but consider alternative agreements with employees and contractors, such as confidentiality and non-solicitation agreements, in addition to non-competes that could potentially become unenforceable.

If you have any questions regarding the FTC’s final rule banning non-competes and what you can or should do, you should reach out to Orla McCabe at orla.mccabe@wg-law.com or 212-509-1910, and for questions specifically relating to franchises, David Azrin at david.azrin@wg-law.com or 212-509-4745. 

This summary has been prepared for general informational purposes only and does not constitute legal advice.  It is intended only as a summary of the FTC’s final rule banning non-competes and does not contain all details applicable to the FTC’s final rule banning non-competes.  This summary may be construed as attorney advertising.