FTC’s New Non-Compete Clause Rule: What It Means for Employers and Workers
On April 23, 2024, the Federal Trade Commission (“FTC”) announced its Final Non-Compete Clause Rule (the “Rule”), effectively banning post-employment non-compete clauses between employers and workers. Initially proposed in January 2023, the Rule received over 26,000 comments during the 90-day comment window, with more than 25,000 comments supporting the proposal.
Definition of a Non-Compete Clause
The Rule defines a non-compete 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 person where such work would begin after the conclusion of the employment that includes the term or condition; or
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.
Current State of Non-Compete Agreements
Presently, agreements containing non-compete clauses are governed by common law and state restrictive covenant statutes. Non-competes have been challenged under both federal and state antitrust laws, but these challenges have had minimal impact. Most states restrict non-compete clauses based on geographical reach, duration, and the type of activity prohibited, requiring these restrictions to be “reasonable.” Consequently, non-compete clauses are subject to the court’s interpretation of what constitutes a legitimate business interest.
Certain states, like California, Oklahoma, and North Dakota, have statutes that render non-compete clauses void except in very limited circumstances. For instance, California allows non-compete clauses in some cases involving the sale of a business. Other states, including Arizona, Colorado, Illinois, Nevada, and Washington, have enacted restrictive covenant statutes that void specific non-compete clauses based on factors such as worker’s earnings, consideration, and notice.
Key Provisions of the FTC’s Rule
The FTC’s Final Non-Compete Clause Rule prohibits non-compete agreements for most workers, with some exceptions for senior executives and clauses related to business sales. The Rule also addresses other restrictive covenants like non-disclosure and non-solicitation agreements, considering them non-compete agreements if they have sufficiently similar effects. Companies are required to inform employees of the new rule and instruct them that any non-compete agreements they have signed are void.
Legal Challenges and Implementation Timeline
Immediately following the FTC’s announcement, two separate lawsuits were filed, alleging that the FTC failed to consider less sweeping alternatives. Both lawsuits argue that the 1914 law establishing the FTC is unconstitutional because it restricts the president from firing FTC commissioners without cause. Critics argue that the substantial power wielded by modern agencies makes this precedent inapplicable, despite the Supreme Court’s previous rulings upholding the FTC’s independence (see Humphrey’s Executor v. United States.
The Rule’s effective date remains uncertain due to these legal challenges. Once published in the Federal Register, the final rule will become effective 120 days later. Currently, the Rule is scheduled for publication in the Federal Register on May 7, 2024, making the effective date October 22, 2024.
Contact Us
For more information on the FTC’s decision on non-compete agreements and how it may impact your business, please contact Holon Law Partners at info@holonlaw.com.
Holon Law Partners has 100+ years of experience combined guiding clients through complex cases and legal intricacies. Our approach is empathetic, customized, and client-centered with a focus on you and your unique business needs. To schedule a consultation with us, call our team at (866) 372-0726 or email us at: info@holonlaw.com.
Relevant Resources
- FTC’s Final Non-Compete Clause Rule (https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-final-rule-ban-non-compete-clauses)
- Humphrey’s Executor v. United States https://www.oyez.org/cases/1900-1940/295us602
