On April 23, 2024, the Federal Trade Commission (“FTC”) announced a final rule banning noncompete agreements nationwide. Of course, most California employers already think of noncompetes as things of the past (see our previous posts about California’s recent legislation here and here). Still, this new rule is important, particularly for multi-state employers.
Overview of FTC’s Rule
Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable. Existing noncompetes for “senior executives” (employees who earn more than $151,164 annually and are in policy-making positions) can remain in force, but employers may not enter into new noncompetes with any employees after the rule goes into effect (120 days after publication).
Employers also must provide written notice to current and former employees (other than “senior executives”) bound by noncompetes that they will not enforce any noncompete agreements against them. The rule includes model notice language (available here) and a safe harbor provision for employers who use it.
The new rule allows for noncompetes during the “bona fide sale of a business” or the sale of someone’s ownership interest. Also, unlike California’s recent legislation, the FTC clarified that customer non-solicit and employee non-recruitment agreements remain valid and enforceable, so long as they do not have the effect of preventing someone from getting a job (to be determined on a case-by-case basis).
Legal Challenges
Many are saying that this new rule is evidence of activist policymaking by those in positions of power with the FTC. So it wasn’t surprising that within 24 hours after the FTC issued the rule, two lawsuits were filed challenging it: one by the US Chamber of Commerce and the Business Roundtable, and another by a business tax services firm. Many anticipate additional legislation will be filed and an injunction pending resolution is likely.
Alternatives to Noncompetes
In its announcement of the new rule, the FTC emphasized that employers can “protect their investments without having to enforce a noncompete.” Specifically, employers may protect proprietary and other sensitive information under trade secret laws and non-disclosure agreements. The FTC also suggested that employers retain employees by “improving wages and working conditions.”
