Federal Trade Commission Headquarters

FTC Issues Final Rule Banning Non-Compete Agreements Nationwide

On April 23, 2024, in a 3-2 vote, the Federal Trade Commission (FTC) issued a final rule banning non-compete clauses in most employment agreements nationwide. The rule is scheduled to go into effect 120 days after it is published in the Federal Register. The FTC’s vote on the final rule comes over a year after it published a proposed rule on January 5, 2023.

Under the final rule, “Non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The final rule covers all entities subject to the FTC Act (generally, most for-profit entities, but not non-profit organizations).

Some of the key elements of the final rule include:

    • Starting from the effective date, the ban prohibits all new post-employment non-compete agreements between employers and employees across all industries and worker types, including both senior executives and lower-level employees. It does not apply to agreements prohibiting an employee from competing against an employer while employed
    • Post-employment non-compete agreements that are already in place may continue to be enforced, but only for senior executives. The definition of a senior executive is generally an employee who holds a policy-making position and earns an annual salary exceeding $151,164.
      • Policy-making position is defined in part as “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”
    • While employers are not obligated to formally rescind existing non-compete agreements, they are required to notify employees that post-employment non-compete agreements are no longer enforceable.
    • The ban makes an exception for non-compete agreements related to the sale of a business, regardless of the ownership percentage involved in the transaction.
    • The ban does not apply to contracts between franchisees and franchisors. However, it does apply to employees working for either a franchisee or a franchisor.

While the rulemaking may be a new step for the FTC, its purpose is in step with the Agency’s recent decisions; an example of which was included in the press release announcing the proposed rule, “This [rulemaking] aligns with the FTC’s recent statement to reinvigorate Section 5 of the FTC Act, which bans unfair methods of competition. The FTC recently used its Section 5 authority to ban companies from imposing onerous noncompetes on their workers. In one complaint, the FTC took action against a Michigan-based security guard company and its key executives for using coercive noncompetes on low-wage employees.”

We anticipate that a number of legal challenges to the FTC’s authority to ban non-compete agreements will be mounted. The US Chamber of Commerce already announced that it will be filing a lawsuit. We will continue to keep you informed of new developments.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.

Attorney David J. HoustonFraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Andrew G. Martin is an experienced registered patent attorney with history working in the automotive, electrical, and agricultural industries. He regularly advises startups and small businesses on the patent and trademark prosecution process, assisting clients from start to finish. You can reach him at 517.377.0834 or at amartin@fraserlawfirm.com.