Noncompete Agreements Banned by FTC
Author: Robert S. Teachout, Brightmine Legal Editor
April 23, 2024
Employers across the US will soon be prohibited from entering or enforcing noncompete clauses, following a vote today by the Federal Trade Commission (FTC) approving a final rule banning such agreements.
Effective 120 days following publication of the rule in the Federal Register, it will be an unfair method of competition for an employer to:
- Enter into or attempt to enter into a noncompete agreement with any employee, including senior executives after the effective date;
- Maintain a noncompete agreement with an employee; or
- Represent to an employee, other than a senior executive with an existing noncompete, that the employee is subject to a noncompete agreement.
The new rule also requires employers to rescind existing noncompete agreements and actively notify workers that they are no longer in effect, except in the case of existing noncompete agreements for senior executives. Existing noncompete agreements for other employees are not enforceable after the rule's effective date. The final rule also does not apply to persons who enter a noncompete agreement pursuant to the sale of a business.
The rule does not bar other types of restrictive covenants such as nondisclosure agreements or nonsolicitation agreements unless they are "so unusually broad in scope" that they effectively function as noncompete agreements.
The FTC justified the need for the final rule by citing studies showing that noncompete agreements reduce competition in labor markets, resulting in reduced wages for all workers. It also estimates that banning noncompete agreements would increase workers' total earnings by $250 billion to $296 billion per year.
The US Chamber of Commerce has already indicated their intent to immediately challenge the new rule in court, arguing that the FTC exceeded its authority under the Federal Trade Commission Act and that the rule unlawfully infringes on state contract laws.