In January 2023, the Federal Trade Commission (FTC) proposed a rule generally prohibiting employers from imposing noncompetes on their workers. In the following year and change, the federal agency received more than 26,000 comments on the proposed rule, with over 25,000 comments supporting the FTC’s proposed ban on noncompetes.
Yesterday, the FTC voted 3-2 in favor of a final Noncompete Rule imposing a comprehensive ban on new noncompetes with all workers, including senior executives.
Let’s break it down.
The rule prohibits employers from entering into new noncompetes with all workers as of the effective date. The term “worker” includes employees and individuals classified as independent contractors and other kinds of workers. However, franchisor/franchisee non-competes are exempted. The final rule also includes an exception that allows noncompetes between the seller and buyer of a business, and does not cover nonprofit businesses outside the FTC’s jurisdiction.
In another departure from the proposed rule, the FTC’s final rule allows existing noncompetes for senior executives to remain in force. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. Employers, however, cannot enter into or enforce new noncompetes with senior executives.
Otherwise, if employers have existing noncompetes in place when the final rule takes effect 120 days after publication in the Federal Register, they do not need to modify them by formally rescinding them. However, under the final rule, employers must notify those workers that the company will not enforce the noncompete in the future. The Commission has included model language in the final rule that employers can use to communicate to workers on paper, by mail, by email, or by text, stating that the employer will not enforce any non-compete clause against the worker.
The new rule does not generally impact NDAs or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business.
If states have more restrictive rules governing noncompetes, they will continue to apply.
The FTC’s final rule is a complete game-changer if it can survive what are sure to be several court challenges. A Dallas-based company has already filed suit, and the US Chamber of Commerce has announced that it will “sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.” Here is a possible roadmap.
So, if your business has existing noncompetes, you may not need to rescind them. If your company intends to enter into reasonable noncompetes with workers, consider other options (e.g., NDAs and nonsolicits), but don’t scrap those plans entirely just yet.
For more on the proposed rule, check out this FTC press release and this FTC fact sheet.