In a close vote on April 23, 2024, the Federal Trade Commission (FTC) acted to issue a final rule banning most employer-employee non-compete agreements. The rule would bar most new non-compete agreements and would also bar employers from enforcing most existing agreements.  The FTC rule still faces legal challenges from the U.S. Chamber of Commerce among others.

Which non-compete agreements are affected? For workers who are not “senior executives,” that is, workers earning over $151,164 and who work “in a policy-making position,” the FTC rule renders existing non-competes unenforceable after the final rule’s effective date (120 days after the rule is published in the Federal Register). Going forward, the FTC rule also prohibits entering or attempting to enter into a non-compete, enforcing or attempting to enforce a non-compete, or representing that a worker is subject to a non-compete.

Existing non-competes with senior executives remain in force, but companies and individuals are prohibited from entering into new non-competes with senior executives after the rule’s effective date. Companies and individuals are also prohibited from attempting to enforce non-competes with senior executives entered after the effective date of the rule.

What employees are covered by the rule? The final rule applies to “workers.” The term “worker” is defined broadly in the rule, and encompasses more than those “workers” that we traditionally think of as “employees.  The FTC rule defines a “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” (emphasis added)

Are there steps that employers need to take? Companies or individuals who entered into non-compete clauses with workers (other than senior executives) “must provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” The FTC rule provides guidance on acceptable forms of notice and model language for the required notices.

Are there exceptions to the application of the FTC rule?  Yes, as with many state laws that have already banned non-compete agreements (e.g. Minnesota), there are a few significant exceptions to the ban:

• The rule will “not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” This exception means that non-competition arrangements with sellers/owners, a typical feature in asset or equity transactions, remain permissible and enforceable.
• The ban will not apply to cases “where a cause of action related to a non-compete clause accrued prior to the effective date.” This means that lawsuits commenced prior to the rule’s effective date (again, 120 days following publication in the Federal Register), are not affected by the rule.
• While the FTC rule defines the term “worker” to include a natural person who works for a franchisee or franchisor, the rule does not apply to a franchisee in the context of a franchisee-franchisor relationship. This means that the non-compete restrictions common to many franchisor-franchisee agreements will remain enforceable even after the rule’s effective date.

As noted, the rule is already facing legal challenges by the U.S. Chamber of Commerce and others, leaving the actual implementation of the rule up in the air. Frazer Ryan will continue to monitor these developments and provide further updates. Even so, businesses with existing non-compete agreements or which are considering the use of such agreements in the future should evaluate their next steps in the event the FTC rule is allowed to take effect.

The final FTC rule is 570 pages in length, meaning there are particulars that just cannot be covered here. If you have questions about how the FTC rule may affect your business, please reach out to one of our business and transaction attorneys.

Please contact Roger Stahl or another attorney at our firm with questions regarding non-compete agreements or any other Business Law matter.