The Federal Trade Commission (FTC) has approved a new Rule which bans for-profit employers from entering into post-employment, non-compete agreements with employees. By a vote of 3 to 2 the FTC determined that these non-compete agreements constitute "unfair competition" under the FTC Act. The Rule is effective 120 days after it is published in the Federal Register. Here's what employers and executives need to know.
What is a non-compete clause?
A Non-Compete clause is defined as a clause which prevents or penalizes a worker for:
- seeking or accepting work in the United States with a different employer after conclusion of employment, or;
- operating a business in the United States after the conclusion of employment.
What is the impact of the new Rule?
The Rule effectively bans clauses in agreements which prevent an employee from working for a competitor or operating a competitive business. After the Rule becomes effective, new non-compete agreements are banned and existing non-compete agreements are unenforceable. The Rule only applies to post-employment periods. The new rule also requires a notice to any employee who is subject to a banned non-compete agreement advising the employee that the non-compete provisions are not enforceable. The Rule contains a model notice which employers can use.
Are there any exceptions to the Rule?
There are two exceptions. The first exception is for the bona fide sale of a business: the seller of a business may be subject to a non-compete clause.
The second exception applies to senior executives. The Rule permits enforcement of existing non-compete agreements with senior executives who earn $151,164 and are in a policy-making position.
Will the Rule be challenged in court?
The US Chamber of Commerce, which has been fighting the proposed Rule, has recently challenged the Rule in court.
Traditionally, non-competition law has been reserved to the States, and certain individual states, most notably California, have banned non-compete agreements. The New York legislature approved a similar ban in 2023, but New York Governor, Kathy Hochul, vetoed the proposal.
The Rule would supersede State law which is less restrictive. However, State law which is more protective of employees would presumably still be enforceable. While the Rule does not specifically ban other restrictive clauses (e.g., clauses that prohibit former employees from soliciting clients), we expect courts will be called upon to determine if additional prohibitions fall under the Rule.
While the timing and effectiveness of the new Rule are not yet clear, employers should review existing agreements and forms today, with an eye to creating alternative approaches to achieving their goals.
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