FTC Final Rule Prohibits Employer-Worker Non-Compete Agreements

The recent announcement by the Federal Trade Commission regarding the prohibition of non-compete agreements between employers and workers nationwide marks a significant shift in employment law. This final rule issued by the FTC on April 23, 2024, aims to safeguard workers’ rights and foster worker mobility across the United States.

Traditionally, the legality and enforceability of non-compete agreements have been governed by state laws. However, many states have already taken steps to limit the scope of these agreements, recognizing their potential to hinder workers’ mobility and restrict job opportunities. With the issuance of this new federal rule, the FTC extends this protection to workers nationwide, effectively banning the enforcement of non-compete agreements that prevent employees from pursuing new job opportunities or starting their own businesses.

The FTC’s press release describes its rationale behind the final rule as follows:

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation. An estimated 30 million workers — nearly one in five Americans — are subject to a noncompete.”

It’s important to note that while the FTC’s rule targets non-compete agreements specifically, it does not affect other types of employment agreements, such as non-solicitation and confidentiality agreements, which remain valid under existing laws. Employers are advised to review their current agreements and ensure compliance with the new rule to avoid potential legal challenges.

The current effective date for the FTC’s rule is 120 days after publication in the Federal Reister.  Despite the FTC’s efforts to implement the rule expeditiously, its full implementation may face legal hurdles and delays. Employers should stay informed about any developments and seek legal guidance to navigate these changes effectively.

If — and when — the rule becomes effective, employers have notice obligations to workers currently under non-compete agreement.  The FTC’s rule would have retroactive effect to voiding existing non-competes with respect to workers who are not senior executives.  Non-compete agreements with senior executives remain enforceable only if they were entered into before the effective date of the FTC rule.  The FTC rule additionally creates an exception for non-competes entered into in connection with the sale or purchase of a business (as the sale or purchase of a business is defined under the FTC rule).

Furthermore, certain industries, such as banks and common carriers, may be exempt from the rule’s provisions. Employers operating in these sectors should assess their status and obligations under the FTC Act accordingly.

Overall, the FTC’s decision to prohibit non-compete agreements represents a significant attempt to protect workers’ rights and eliminate barriers towards worker mobility.  By removing barriers to job mobility and entrepreneurship, the FTC aims to create opportunities for workers to thrive and contribute to economic growth and innovation.

Shar Bahmani is an attorney at Sacks Tierney. If you have additional questions regarding the enforceability of non-compete agreements or employment matters, please contact him at www.sackstierney.com.