On April 23, 2024, by a 3 to 2 vote, the Federal Trade Commission (FTC) issued a final rule to “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
In the final rule, the FTC stated that it is an unfair method of competition to require employees to enter into noncompete agreements with their employers and for employers to enforce certain noncompetes.
What exactly does the final rule prohibit?
Once in effect, the final rule prohibits employers from establishing new noncompete agreements.
For noncompete agreements in effect prior to the final rule's effective date, employers will be prohibited from enforcing or attempting to enforce a noncompete unless the employee is a "senior executive." The FTC defines a senior executive as a worker earning more than $151,164 annually and in a policy-making position.
Additionally, under the final rule, employers must notify workers with existing noncompete agreements. The notice must disclose that their noncompete agreement will not—and cannot—be enforced against them. The FTC published a model notice to simplify compliance with this notice requirement, Figure 1 to Section 910.2(b)(4) on page 566 of the final rule.
A copy of the final rule can be found here.
When does the final rule take effect?
The final rule is scheduled to take effect 120 days after its publication in the Federal Register. However, several legal challenges have already been filed against it in court, which could postpone or prohibit its enforcement.
What does this mean for employers?
The success of the pending legal challenges is uncertain, which means whether (and when) the final rule takes effect is also unknown. Nevertheless, employers should be given plenty of time to prepare if the rule does take effect.
Proactive employers may wish to consult their legal counsel and review their noncompete practices to assess why they use noncompete agreements and consider alternatives. For example, the FTC found that trade secret laws and non-disclosure agreements can be alternatives to protecting a company’s proprietary and other sensitive information. In addition, the FTC suggests that employers who want to retain workers can do so by improving their wages and working conditions.
Verified Credentials will monitor and provide updates on this issue as it evolves.
