On May 7th, 2024, the Federal Register published new final rules from the Federal Trade Commission (FTC) banning non-compete agreements from being enforced for non-senior executives, and banning the creation of new non-compete agreements. 

The rule was passed 3-2, and it is expected to face challenges from business organizations, including major questions doctrine challenges focusing on the limits of FTC authority on such a broad topic in the economy. 

FTC Non-Compete Clause Rule– Banning Almost All Non-Compete Agreements 

The FTC states at the start of the final rule, in their summary: 

The final rule provides that it is an unfair method of competition for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non- competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non- competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.  

If the rule goes into effect 120 days after publication, and with publication set for May 7th, 2024, the rule is expected to go into effect on September 4th, 2024. 

As noted in the summary, when the rule goes into effect the ban on new non-compete agreements is total. 

The rule takes a different view of existing non-compete agreements, allowing a small amount of existing non-compete agreements already entered between employers and senior executives to continue. The FTC notes as their rationale: 

The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non- competes for senior executives. 

Senior executives are defined as workers who earn a salary above $151,164 and have roles that include “policy-making positions”.  Workers earning either less than this salary threshold, or who do not set policy for their employers, are also exempt from existing non-compete agreements.  The FTC estimates only around .75%, or three quarters of one percent, of non-compete agreements will be enforceable once the rule is in effect. 

Companies looking to protect trade secrets or other sensitive information can still use trade secret laws, or non-disclosure agreements (NDAs) to protect sensitive business information without damaging workers’ future employers opportunities. 

FTC Requires Employers to Notify Workers Non-Competes No Longer Valid 

The FTC noted that it received hundreds of comments about non-compete agreements employees weren’t aware they were entering into before leaving a previous employer to start a new job, or were only given a non-compete at some point later after already being employed. The FTC notes: 

Many workers— including highly paid and highly skilled workers—stated that they did not receive notice that they would be required to sign a non-compete until after accepting a job offer. Some workers said they were told of the non-compete after accepting the job but before starting work. Many workers who described when they were notified of a non-compete said it was on their first day of work or even later. Many workers stated that they were required to sign their non-compete after a merger or acquisition—i.e., after they were already on the job but there was a change in ownership of the company. For example, a trade organization stated that it is common for the purchaser of a business to impose non- competes on its workers, which may trap workers in an organization different from the one they originally agreed to work for. An employment law firm commented that even highly paid or highly skilled workers do not always receive notice of non-competes with the employment offer.  

In order to make sure workers do not continue to be affected by now non-enforceable non-compete agreements, the FTC is requiring companies give notice to workers.  The FTC defined workers in the final rule as including both current and prior employees, companies will have to send notice by mail, email, or text message to both existing and prior employees to ensure they are aware their non-compete agreements are void. 

The sample notice: 

Expected Effects of the Non-Compete Rule 

FTC Chair Lina M. Khan highlighted the rule’s expected impact: 

The FTC projects that abolishing non-competes will result in a 2.7% increase in new business formation each year, translating to an additional 8,500 new businesses. This change is also expected to boost workers’ earnings by an average of $524 annually and potentially reduce healthcare costs by up to $194 billion over the next decade. Moreover, the rule could lead to a significant increase in patent filings, with an estimated 17,000 to 29,000 additional patents expected annually for the next ten years.

California Non-Compete Ban 

California, home to approximately one of eight workers in the United States, previously banned non-compete agreements as of January 1st, 2024.  The law was passed via Assembly Bill 1076. 

The California banned required employers to send written notice no later than Februrary 14th, 2024, to current and formers employees with employment dates in 2022 or later, who are based in California.  The notice was to be individualized to each employee or prior employee, and inform them that any previous non-compete agreements are void and unenforceable under the new California law. 

The California law contains a penalty of $2,500 for each violation. 

Non-Compete and Employment Lawyers 

If you believe you were subject to an illegal agreement, or have any other questions for our employment attorneys, we invite you to schedule a consultation with an employment law attorney in our California, Texas or Puerto Rico offices. Schneider Wallace Cottrell Konecky LLP is a national law firm that represents employees in a wide range of employment law cases, including class action lawsuits involving the failure to pay wages, overtime pay and commissions. Contact us at 1-800-689-0024.