New FTC Regulation Bans Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (the “FTC”) approved a new rule prohibiting employment related non-compete clauses. FTC Commissioners voted 3-2 along party lines to approve the new rule. The rule will be effective 120 days after publication in the Federal Register, and employees and employers should expect the rule to become effective on approximately September 1, 2024.

What Is Covered by the New Rule?

The new rule bans non-compete agreements or clauses for all workers going forward after the rule’s effective date. The rule also invalidates existing non-compete agreements or clauses made prior to the rule’s effective date. In other words, current agreements will no longer be enforceable. The rule is applicable to any clause between an employer and employee that (i) prohibits a worker from, or (ii) penalizes a worker for, or (iii) functions to prevent a worker from seeking or accepting another job after the conclusion of their employment. Items (i) or (ii) can be read as a straightforward ban on clauses that prohibit an employee’s ability to accept employment with a competitor (or another employer). Item (iii) could, arguably, expand the concept of non-compete clauses to include non-solicitation clauses as well. Should a non-solicit clause be construed to functionally prevent a worker from obtaining work, the non-solicit clause could also be unenforceable under the new rule.

What Is Not Covered by the New Rule?

There are certain types of non-compete agreements that will not fall under the rule. Any existing non-compete for “Senior Executives” will still be enforceable. The FTC defines Senior Executives as any employee earning $151,164 or more annually and has a policy making position. This exemption for Senior Executives is not available to new non-compete clauses entered into after the rule’s effective date. Non-compete clauses that are related to the sale of a business are also outside of the scope of the rule and are not banned. Additionally, the FTC has enacted the new rule under Section 5 of the FTC Act, which does not apply to non-profit organizations and as such the rule cannot apply to agreements entered into with a non-profit.

Alternatives to Non-Compete Clauses

In the FTC’s corresponding press release announcing the rule, it pointed to alternatives to non-compete agreements or clauses. The FTC noted that an estimated 95% of workers subject to a non-compete agreement are also subject to non-disclosure agreements that protect the employer’s confidential and proprietary information. Although the new rule did not include an exception if so called “Garden Leave” (compensation paid in exchange for the non-compete) is provided to a former employee, the FTC does note in the rule “that an agreement whereby the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the [the rule’s] definition, because such an agreement is not a post-employment restriction. Instead, the worker continues to be employed, even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed.”

Challenge to the Rule

The United States Chamber of Commerce (the “Chamber of Commerce”) immediately condemned the new rule as “undermining well-established state laws that have governed the use of non-compete agreements.” The Chamber of Commerce has taken the position that the FTC is acting outside of its constitutional and statutory authority by issuing the new rule. The Chamber of Commerce has filed a complaint against the FTC for declaratory and injunctive relief in the United States District Court for the Eastern District of Texas.

New Developments  

Rudolph Friedmann LLP will provide further information on the FTC’s new rule as it becomes available. Should you have any questions on the rule’s impact on your company or your employment, please contact the attorneys at Rudolph Friedmann LLP.