Breakdown of FTC’s Latest Rule That Bans Noncompete Agreements

If you are a business that hires workers or are hired as a worker, then you need to know about a new final rule recently announced by the Federal Trade Commission (“FTC“) that will ban noncompete agreements in the United States. The Non-Compete Clause Rule (“Rule“) will affect over 30 million workers who are currently under noncompete restrictions.

I used to work at the FTC and read all 570 pages of the Rule so you didn’t have to. Below are 9 key points:

Point 1 – Rule’s Purpose
The Rule was enacted to (1) promote competition by banning noncompetes nationwide; (2) protect workers’ freedom to change jobs; (3) increase innovation; and (4) foster new business formations.

Point 2 – Effective Date
The effective date of the Rule is September 4, 2024.

Point 3 – Ban on Noncompetes
After the Rule’s effective date, for parties that the FTC has authority over:

(1) there is a complete ban on new noncompetes with all workers, including senior executives;

(2) existing noncompetes with workers who are not senior executives will be unenforceable; and

(3) existing noncompetes with senior executives can remain in force.

Point 4 – Rule May or May Not Apply to Workers of Nonprofits
The Federal Trademark Commission Act gives the FTC the authority to issue/create rules and regulations to prevent unfair methods of competition. The FTC generally lacks jurisdiction to prevent these violations by a corporation not organized to carry on business (i.e. normally nonprofits).

However, just because a corporation has nonprofit/tax-exempt status doesn’t mean it will fall outside of the FTC’s jurisdiction. For this reason, the analysis as to whether the Rule applies to nonprofits (like hospitals) and workers engaged by nonprofits must be assessed on a case by case basis.

Point 5 – Employers Must Provide Notice
Before the Rule’s effective date, employers must provide affected workers under existing noncompetes notice that the noncompetes are no longer enforceable.

Point 6 – Definition of Noncompete
The Rule defines a noncompete/non-compete clause as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from:

(1) seeking or accepting work in the U.S. with a different person where such work would begin after the
conclusion of the employment that includes the term or condition; or

(2) operating a business in the United States after the conclusion of the employment that includes the term or
condition.

Point 7 – Other Pertinent Definitions
To understand the words above that are underlined and italicized, it’s important to note their definitions:

• term or condition of employment: includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
• employment: work for a person
• worker

• • a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person
  • also includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship
• person: any natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction, including any person acting under color or authority of State law
• senior executives: workers earning more than $151,164 who are in a policy-making position (ex. CEOs)

Point 8 – Enforcement of the Rule
The FTC (and potentially States) would enforce the Rule. The FTC is known to impose severe fines for non-compliance of their rules.

The U.S. Chamber of Commerce and other business groups sued the FTC and are seeking to ban the Rule alleging that the FTC lacks the power to adopt sweeping rules like the Rule.

This being said, until these suits are resolved (which can take years), compliance with the Rule is required.

Point 9 – Summary
After September 4, 2024:

• existing noncompete agreements with senior executives (ex. CEOs) can still be enforced;
• existing noncompete agreements with pretty much all other workers are unenforceable; and
• no new noncompete agreements can be created for all workers (including senior executives).

If a noncompete is unenforceable, no individual who has worked for another party in any capacity (ex. unpaid or paid employee, independent contractor, intern etc.) can be prevented from working for someone else or starting their own business.

The ban does not apply to franchisees, like owners of chain restaurants, and for workers of certain nonprofits.

Next Steps
If you’re a business that hires workers and are a worker and need help determining (1) whether your work agreements contain noncompetes and/or (2) your next steps in terms of compliance, you can email us at info@jllaw.net or call us at 347-946-0597.