On April 23, 2024, during a special Open Commission Meeting, the Federal Trade Commission (“FTC”) voted 3-2 to issue a final rule that will ban nearly all employee non-compete agreements. As we discussed in January 2023, all non-compete agreements will be unenforceable regardless of any consideration provided for the agreements or whether the agreements are arguably reasonable and limited in scope.
Highlights
- The final rule will require employers to rescind existing non-compete agreements (model language will be provided by the FTC).
- Employers will be prohibited from entering into new non-compete agreements with employees, including independent contractors and senior executives.
- Existing non-compete agreements would remain in effect for senior executives, defined as employees in a policy-making position earning more than $151,164.
- The final rule includes an exception for non-compete agreements between sellers and buyers of businesses to protect the value of the businesses being acquired.
- The final rule will not apply to franchisee/franchisor agreements, although it will apply to employees working for a franchisee or franchisor.
- The FTC Act does not apply to true non-profit organizations and thus, the final rule will not apply to those entities.
According to the FTC, a non-compete agreement is broadly defined 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 employment in the United States or operating a business in the United States after the conclusion of the worker’s employment that includes the term or condition. For purposes of the final rule, a “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
The FTC also addressed issues specific to other types of restrictive employment agreements, including confidentiality agreements, non-solicitation agreements, and training-repayment agreements. A non-solicitation agreement is a contract in which the employee agrees to not solicit the employer’s customers or clients after leaving the company. The final rule does not categorically prohibit confidentiality agreements, non-solicitation agreements, and training-repayment agreements. However, if the agreement contains a term or condition that is so broad or onerous that it has the same functional effect as prohibiting or penalizing a worker from seeking or accepting other employment after their employment ends, such agreement will be viewed as a non-compete agreement under the final rule.
The final rule will take effect 120 days after it is published in the Federal Register, however the effective date may be delayed due to legal challenges. For instance, on April 24, 2024, the U.S. Chamber of Commerce filed a lawsuit in federal court alleging the FTC lacks the authority to issue rules that define unfair methods of competition.
The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.
