On April 23, 2024,  the U.S. Federal Trade Commission (the “FTC”) published a new rule banning most non-compete clauses in employment contracts. The new rule was issued by a narrow margin of 3:2, and comes as an effort by the FTC to promote competition, protect the freedom of workers to change jobs, and increase innovation. FTC Chair Lina M. Khan has explained that the rule will “ensure that Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

What does the new rule do?

The FTC has determined that non-competes amount to an unfair method of competition and is, therefore, violative of Section 5 of the FTC Act. As such, the new rule aims to address this unfair competition.

The new rule does three things. First, the new rule prohibits employers from entering into any new non-compete agreements with employees as of the effective date of the final rule (which will be 120 days after the rule is published in the Federal Register).

Second, the rule specifically allows for  existing non-competes pertaining to senior executives to remain in full force and effect. However, existing non-compete agreements with workers other than senior executives are not enforceable as of the effective date of the final rule.  For the purposes of this rule, senior executives are defined as executives in a company making more than $151,164.00 annually and who are in policy making positions. As noted above, as of the effective date, new non-compete agreements with senior executives will be subject to the FTC ban.

Third, the new rule mandates that employers provide notice to employees who are subject to an existing non-compete and do not qualify for the senior executive exemption (as  the non-compete will not be enforced against them in the future). The FTC has included the following model  notice language in their rule (§910.2(b)(4)):

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN THE EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN THE EFFECTIVE DATE OF THE FINAL RULE]:

  • You may seek or accept a job with any company or any person- even if they compete with [EMPLOYER NAME].
  • You may run your own business – even if it competes with [EMPLOYER NAME].
  • You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit [Link to final rule landing page]. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at [IRL on FTC’s website].

Should an employer wish to provide alternative notices to its employees, it is recommended that you consult with  counsel to ensure compliance with all required provisions.

FTC’s Definition of Non-Compete

It should be noted that the FTC has adopted a broad definition of what constitutes as non-compete. The rule defines a non-compete clause as: a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

  • Seeking or accepting work in the United States with a different employer after their employment with another employer ends;
  • Operating a business in the United States after their employment with their employer ends.

Confidentiality agreements, nondisclosure agreements, and nonsolicitation agreements will remain enforceable as long as they are not so broadly worded as to fall within the scope of the FTC’s definition of a non-compete agreement.

Additionally, the new rule does not apply to non-profit organizations that do not carry on their business for a profit. Such organizations are unaffected by the new rule. The new rule also allows for non-compete agreements to be entered into in connection with the sale of a business, so long as the sale is not entered into for the purpose of avoiding the new rule.

Considerations

Given the broad definition of a non-compete afforded by the FTC, employers should take great care in drafting any documents restricting the ability of an employee to engage in work after their employment with them ends. Specifically, care should be taken to understand the impact of this new rule on other restrictive covenants, such as non-solicitation clauses. Additionally, employers operating in jurisdictions such as Massachusetts should be mindful of the material change doctrine, which can work to invalidate an existing non-compete with senior executives, should the terms of an employee’s job materially change.

While it is prudent for employers to begin preparations to comply with the new rule, it is critical that employers not act too quickly. Currently, at least one challenge to the new rule has been filed, which may impact its enforcement. Specifically, the U.S. Chamber of Commerce brought suit against the FTC in an attempt to block the new rule. Employers should keep a close eye on this matter as it unfolds.