The Federal Trade Commission (FTC) voted this week to finalize a new rule prohibiting employers from enforcing noncompete agreements against most workers. The rule will take effect 120 days after it is published in the Federal Register, no later than early September 2024.
With its April 23, 2024 vote, the FTC determined that it has the authority to regulate noncompete agreements as an unfair method of competition that violates Section 5 of the Federal Trade Commission Act (FTC Act). This move will supersede state laws that fail to provide the same level of worker protection as the new rule.
The U.S. Chamber of Commerce, among others, already has said it will sue the FTC over whether the Commission has the regulatory authority to make this determination under the FTC Act. This move made by the Chamber calls into question whether legal actions may delay the effective date.
A Fact Sheet published by the FTC provides a synopsis of the Commission’s reasons for adopting the rule along with a summary of key provisions.
What the final noncompete rule covers
There are several key points that HR professionals need to know. When the new rule takes effect, it:
- Prohibits employers from enforcing existing noncompete agreements with workers other than senior executives. “Senior executives” are defined as workers earning more than $151,164 who are in a policy-making position. This is akin to the Section 16 definition of “officer,” with some subtle differences.
- Prohibits employers from entering into new noncompete agreements with all workers.
- Requires employers to notify workers that existing noncompete agreements are no longer enforceable and provides model language that employers can use to notify employees.
- Creates a mechanism for workers to send complaints to the FTC’s Bureau of Competition that could lead to investigations and enforcement actions for rule violations.
- Defines “worker” to include an employee, independent contractor and other service providers, but does not include a franchisee in a franchisee-franchisor relationship.
What the final noncompete rule does not cover
- Noncompete agreements between the seller and buyer of a business as part of a bona fide sale.
- Noncompete agreements that were in litigation prior to the effective date.
- Attempts to enforce a noncompete clause or representations about a noncompete clause when an employer has a good-faith basis to believe that the new rule is inapplicable.
- State authority or private rights of action under state law regarding a noncompete agreement to the extent that the authority or rights have the same or greater restrictions than the FTC rule.
- Certain nonprofit organizations that are not subject tot the FTC Act. Legal counsel should advise whether the organization is exempt.
- Nondisclosure agreements, nonsolicitation agreements and training repayment agreement provisions, if those restrictive employment covenants are not too broad or onerous in scope to functionally have the same effect as a noncompete clause.
Keep a pulse on further actions
This synopsis is far from a complete legal assessment of how your organization would or should comply with this new rule and the transition from its current state. Issues related to trade secret protection, effective hiring and termination practices and interaction with other federal and state laws, among other concerns, should be analyzed by legal counsel.
WTW will continue to follow this new rule. To stay updated on the latest legal and regulatory topics as they arise, subscribe to our Executive Pay Memo newsletter.
