Federal Trade Commission Issues Final Rule Banning Non-competes Nationwide

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule banning non-compete clauses nationwide. The final rule requires a comprehensive ban on all new non-competes with workers, finding that the use of non-competes is an unfair method of competition, and thus a violation of section 5 of the Federal Trade Commission Act.

Current Status of the Final Rule

The final rule, which passed on a 3-2 vote, is scheduled to become effective 120 days after its date of publication in the Federal Register. That publication is expected to occur shortly.

However, it should be noted that enforcement of the final rule may be delayed or even entirely blocked as the rule is already subject to significant legal challenges. Notably, the U.S. Chamber of Commerce has already filed a lawsuit in federal court seeking an injunction to prevent enforcement of the final rule. Employers should closely follow developments as to any related litigation to determine the ultimate status of the final rule, and any potential effective date for the rule.

Requirements under the Final Rule

Should the final rule come into effect, employers will need to take note of the rule’s new requirements and exceptions. Notably, the rule not only provides for a comprehensive ban on new non-competes, but also defines non-competes broadly to include not only standard non-competes, but also any contractual provision that “functions to prevent” a worker from competing. As the FTC has noted, this may for example apply to non-disclosure agreements, non-solicitation agreements, or provisions requiring a worker to repay training costs.

As for the impact of the final rule on pre-existing non-competes, following the final rule’s effective date, such non-competes are no longer enforceable as to any workers who are not “senior executives.” The rule defines the term “senior executive” as workers earning more than $151,164, and who are in a “policy-making position.” The FTC rule provides that existing non-competes with “senior executives” can remain in force.

The final rule also does not apply to non-competes entered into pursuant to a bona fide sale of a business entity. This includes sales of a business, sales of an ownership interest in a business, or sales involving all, or substantially all of a business’s operating assets.

Notice Requirements

Under the final rule employers are required to provide notification to any workers whose non-competes are no longer enforceable. Employers must notify their workers that their non-competes are no longer in effect and will not be enforced. This procedure under the final rule simplifies the procedures provided under the previous January 2023 proposed rule which had originally required employers to formally rescind any such existing non-competes.

Employers and employees who have concerns regarding the impact of the FTC ban should contact Einhorn Barbarito to discuss the impact of the new rule on pre-existing or future non-competes, and other related restrictive covenants.