The FTC Ban on Non-Compete Agreements: What Employees Need to Know

In May of 2024, the Federal Trade Commission (FTC) issued a final rule that bans non-compete agreements between employers and workers in most cases. The rule, set to take effect on September 4, 2024, is far-reaching and will render most non-compete agreements unenforceable, including existing agreements made prior to the rule.

Non-compete agreements (“non-competes”) contractually prohibit employees from working for their employer’s competitors, or for themselves in the same field as their employer, for a set period after their employment ends. The practical effect is that non-competes often force employees to stay in unsatisfactory jobs, when they’d prefer leaving to work on better terms for a competitor or starting their own venture. The FTC reasons that banning non-competes will encourage new business formation, as well as boost wages and benefits as employers offer incentives to retain talent.

Here’s a quick breakdown of what the rule provides:

• What is a “non-compete agreement”? The agency defines a non-compete broadly as “a term or condition of employment that prevents the worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work in the United States, or operating a business in the United States.
• Who is covered by the non-compete ban? All workers employed by a private company are covered, including independent contractors.
• What about pre-existing non-competes? The rule invalidates these agreements, except in two instances:

1. If the non-compete involves a senior executive earning over $151,164 annually and in a policy-making position for the business, or
2. Where a cause of action for breach of a non-compete accrues before the rule’s effective date of September 4, 2024. This exception covers cases where an employee breaks a non-compete, thereby triggering the statute of limitations for a breach of contract claim.

• So after September 4, 2024, is my non-compete no longer enforceable? That’s the question workers (and employers!) want definitively answered. However, my cautious forecast is that the scope and legality of the FTC’s final rule will be subject to challenges – in fact, it already is.

Prepare for Lots of Litigation

Generally speaking, the final rule is open to legal challenge on two bases.

First, there will likely be litigation to clarify the scope of the FTC’s definition of a non-compete. For instance, many companies require employees to sign non-disclosure and non-solicitation agreements in addition to non-competes. However, the FTC’s position is that if any term or condition of employment is “so broad or onerous that it has the same functional effect as . . . prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends,” then it’s considered a non-compete and falls within the ban.

What non-disclosure or non-solicitation terms are so “broad” or “onerous” as to be unenforceable under the FTC rule? Courts will have to decide.

Second, and more importantly, there is already litigation in the works challenging the FTC’s statutory authority to issue a substantive rule banning non-competes in the first instance. As of the date of this post, three district court suits have been filed seeking to enjoin the FTC from implementing or enforcing the rule.

In fact, on July 3, 2024, a District Court judge for the Northern District of Texas granted plaintiffs’ motion to stay and preliminarily enjoin the effective date of the FTC ban on non-competes (Ryan LLC vs. Federal Trade Commission). This means the FTC may not implement or enforce its rule on the effective date of September 4, 2024 – but only with respect to the named plaintiffs in the case. The judge indicated she will make a later decision on the merits of the plaintiffs’ claim that the FTC lacks statutory authority, and may very well issue a nationwide injunction against the non-compete rule at that time.

Keep in mind that the other two district court judges have yet to, at least as of this writing, weigh in on the issue.

And so my advice to employees wondering whether their non-competes are null and void as of September 2024 is: Stay tuned . . . For more information, please contact us.