FTC Bans Noncompete Clauses

In a significant development, the Federal Trade Commission (FTC) made a decision today, April 23, 2024, to enact a novel regulation prohibiting non-compete agreements for a majority of American workers.

Effective 120 days from its publication in the Federal Register, this regulation has the potential to affect up to 30 million U.S. workers, including both employees and independent contractors, who are currently bound by non-compete restrictions. The rule mandates that businesses nullify most existing non-compete agreements and refrain from entering into such agreements with workers in the future.

The U.S. Chamber of Commerce has voiced its intention to challenge the FTC’s decision through legal action.

Key provisions of the regulation include:

• Businesses are prohibited from initiating or upholding non-compete agreements or clauses, or implying to workers that they are subject to such agreements, with only very limited exceptions.

• Workers encompassed by the regulation include employees, independent contractors, interns, volunteers, apprentices, and sole proprietors, regardless of their current or past association with the business.

• Non-disclosure/confidentiality and non-solicitation agreements may still be permissible, provided they are not overly broad and effectively function as non-compete agreements.

• For workers with existing non-compete agreements invalidated by the new regulation, businesses must inform them of the rescission of the non-compete provision by the rule’s effective date. Notices must be delivered in writing via letter, email, or text message, with the FTC providing a model notice for reference.

• Existing non-compete agreements involving “senior executives” remain valid to the extent permitted by state law. The term “senior executive” applies to individuals in policy-making roles (e.g., president, CEO) with an annual compensation of at least $151,164. Businesses cannot establish new non-compete agreements with current or future “senior executives,” irrespective of their policy-making authority or compensation.

• The regulation is slated to come into effect within 120 days of its publication in the Federal Register.