Big Changes for Non-Competes
Federal Trade Commission Issues Rule Banning Most Non-Compete Clauses
In a major shift for worker mobility, the Federal Trade Commission (FTC) announced a final rule prohibiting most non-compete agreements throughout the U.S. This means employers will generally be prevented from requiring workers to sign contracts that limit their ability to take a new job with a competitor, or start a competing business, after leaving the company.
Some states have already adopted statutes rendering non-compete clauses void for nearly all workers, including Oklahoma, California, and North Dakota. For everyone else, though, this opens the door for significant new opportunities.
What is Affected?
New Non-Compete Agreements: Banned for all workers, including senior executives, after the effective date (set for September 4, 2024). Additionally, employers cannot represent to workers or to any third parties that a worker is subject to a non-compete clause.
Existing Non-Compete Agreements: Pre-existing agreements with senior executives can remain in force. “Senior executives” are workers earning more than $151,164 annually who are in a “policy-making position.”
Non-Compete Agreements Between Businesses: The new rule defines “workers” as natural persons, therefore, non-compete agreements between businesses are still enforceable as well as when used in the context of franchisor/franchisee relationships. Additionally, those entered into in a “bona fide” sale of a business remain enforceable.
Business Outside the U.S.: Non-compete agreements that restrict work outside the U.S. or starting a business outside the U.S. can remain in effect.
What Does This Mean?
Increased Worker Wages and Mobility: Workers will be able to freely negotiate for better salaries and opportunities at other companies, potentially leading to an increase in average wages by thousands of dollars per year. This newfound leverage could also benefit workers who choose to stay with their current employer.
Boosted Innovation and Competition: With a wider talent pool, startups and new businesses may find it easier to attract skilled workers. This could lead to a more competitive market with a greater variety of ideas and products.
Economic Growth: The FTC predicts a significant rise in new business formation, with estimates suggesting thousands of additional startups each year. This could create more jobs and contribute to overall economic health.
What is Still Enforceable?
Among other types of agreements and clauses, the following will likely remain enforceable, so long as the terms do not become so overly broad as to prohibit or penalize a worker from seeking or accepting other work or starting a business after their employment ends:
Nondisclosure Agreements (NDAs);
Client or Customer Non-Solicitation Agreements; and
Training-Repayment Agreements.
What Happens Next?
Effective Date: The final rule was published in the Federal Register on April 23, 2024. There is a 120-day waiting period after publication before it becomes enforceable.
Employers: Employers will need to rescind existing non-compete agreements entered into before the rule’s effective date and inform workers that such agreements are no longer in effect.
Workers: Workers should review their employment contracts and ensure they understand whether any other clauses, such as Non-Disclosure and Non-Solicitation clauses, are still enforceable.
Stay Informed:
It is estimated that one in five American workers is bound by a non-compete clause. That means around 30 million people will be affected by the new rule.
Whether you are a worker or an employer, we recommend ensuring you understand your rights/obligations and you can contact us here to schedule a consultation.
****This summary provides a concise overview of the recent changes with regard to non-compete agreements, and is not to be construed as legal advice for your specific situation. Please contact us if you have questions or need assistance.
