For decades, non-competition agreements have tied the hands of millions of American workers at all levels and in every industry after they leave a job, limiting opportunities or keeping them from working in their chosen field or profession. Now, however, a recently announced federal rule has banned almost all existing and future non-competes. With three very specific exceptions, the Final Rule approved by the Federal Trade Commission (FTC) on April 23, 2024 renders most such agreements and clauses null and void, freeing countless workers from the restraints and burdens imposed by non-competes.
Given the dramatic and widespread implications of this sea change in employment law, it is unsurprising that lawsuits challenging the validity of the rule were filed within hours after its release. Short of any judicial intervention, the ban will become effective within 120 days of the Final Rule’s publication in the Federal Register, which has yet to occur.
Presuming the rule goes into effect as planned, here is what employees need to know:
What The Final Rule Prohibits
The Final Rule declares any covered non-compete clause to be an “unfair method of competition” and, therefore, a violation of Section 5 of the federal FTC Act. It prohibits any person from:
- entering into or attempting to enter into a non-compete clause
- enforcing or attempting to enforce a non-compete clause, or
- representing that a worker is subject to a non-compete clause.
The Final Rule defines “non-compete clause” 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 in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.”
A “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
The Final Rule applies to existing non-compete clauses, rendering them void and unenforceable. However, the ban will not nullify a non-compete where a cause of action related to the non-compete has accrued prior to the rule’s effective date.
Workers Covered By The Non-Compete Ban
The Final Rule banning non-competes covers almost all workers other than “senior executives,” as discussed below. Non-competes are prohibited for employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service to a person, and a person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.
Exceptions To The Non-Compete Ban
“Senior Executives”
If you are a “senior executive” as that term is defined in the rule and you are currently subject to a non-compete, the ban does not apply, and the agreement remains valid under the rule. However, the rule does prohibit employers from entering into or enforcing any new non-competes with senior executives after the Final Rule’s effective date.
A “senior executive” to whom the ban does not apply is a worker in a “policy-making position” who earns an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments). In turn, a “policy-making position” is a business entity’s president, chief executive officer, or the equivalent, any other officer who has policy-making authority or any other person who has policy-making authority for the business, similar to an officer with policy-making authority.
Seller of a Business
If you are a business owner selling your company, any non-compete you enter into as part of that sale is not covered by the ban. Such provisions are valid so long as the sale consists of the disposition of your ownership interest in the business entity or all or substantially all of the entity’s operating assets.
Working Outside The U.S.
The Final Rule only applies to workers who work in, or own a business in, the United States. Non-compete provisions that would prevent a worker from seeking or accepting employment or owning a business solely outside the United States are not covered.
Non-Disclosure and Non-Solicitation Clauses Still OK, So Long As They Aren’t Non-Competes By Another Name
The Final Rule does not prohibit non-disclosure or non-solicitation agreements. However, if any such agreement effectively “prohibits,” “penalizes,” or “functions to prevent a worker from” seeking or accepting work after the end of their employment, it may be deemed to be a prohibited non-compete. The FTC states that whether any given provision constitutes a “non-compete clause” is a “fact-specific inquiry.”
As noted, legal challenges to the non-compete ban have already been launched and its ultimate fate remains to be seen. However, presuming it goes into effect as written, this new rule is a huge win for American workers who are now free to pursue whatever opportunities come their way.
If you have any questions about the Final Rule or non-competes generally, contact Tad Roumayah at Sommers Schwartz.
Tad T. Roumayah
Tad Roumayah focuses his practice primarily on employment litigation, representing employees who have encountered discrimination, retaliation, wrongful discharge, whistleblower protection claims, wage and hour violations and other employment issues and disputes.
