FTC Issues Final Rule on Noncompete Agreements

On April 23, 2024, the Federal Trade Commission issued a final rule banning virtually all noncompete agreements. It takes effect 120 days after publication in the Federal Register, which probably means an effective date sometime around the end of August.

The rule prohibits employers from enforcing noncompetes with workers other than senior executives as of the effective date. A "senior executive" is a worker in a "policy-making position" earning more than $151,164 per year. The FTC estimates that fewer than 1% of workers fall into this category. Further, the FTC emphasizes that even that exemption applies only to current noncompetes. Once the rule takes effect, companies cannot enter into new noncompetes with any employees, even senior executives.

The FTC will continue to allow noncompetes between the seller and buyer of a business. Also exempted are nonprofits, although some experts believe the ban will apply if an organization generates revenue for members of a for-profit entity. The final rule is over 500 pages, and lawyers are still poring over the details while companies await further guidance.

There's already a lawsuit

The FTC has defended its decision, noting that "noncompetes restrict workers' fundamental freedom to leave for a better job or to start their own business" and that they "prevent workers from starting their own firms and block new businesses from hiring qualified workers." The FTC says that about one in five Americans, totaling nearly 30 million people, are subject to noncompetes.

However, not everyone agrees. The U.S. Chamber of Commerce issued a statement saying, "The Federal Trade Commission's decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses' ability to remain competitive." The organization is planning to sue the FTC.

So although it's unclear what will happen, prudent companies will use the next few months to review their own noncompete policies, working closely with legal and HR professionals. The FTC is recommending the use of nondisclosure agreements, which it believes will be sufficient to protect proprietary information.

Meanwhile, interested parties can read the FTC's statement and download the fact sheet. Those with the patience to read it can also download the complete rule.

We will follow up with additional guidance as it becomes available.