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On April 23, 2024, the Federal Trade Commission (FTC) announced that it had finalized a new rule that, once implemented, will prohibit employers from enforcing noncompete clauses.

When does the new rule become effective?

The new rule will become effective one hundred twenty (120) days after the publication date of the new rule (which has not yet occurred).

What is the definition of “noncompete clauses” under the new rule?

A non-compete clause means any term or condition of employment that prohibits or prevents a worker from, or penalizes a worker for:

1. seeking or accepting work with a different employer in the United States after separating from the current employer; or
2. operating a business in the United States after separating from the current employer.

What, specifically, does this new rule prohibit?

Under the new rule, employers will be prohibited from:

1. enforcing existing noncompete clauses, except with respect to senior executives (defined as individuals earning at least $151,164 annually and are in a “policy-making” position); and
2. entering into new noncompete agreements with employees.

What does the rule NOT prohibit?

Employers are not prohibited under the new rule from:

1. entering into and enforcing non-solicitation agreements and non-disclosure agreements, provided that they do not meet the definition of “noncompete clause.”
2. entering into and enforcing noncompete clauses in connection with the sale of a business.
3. continuing to litigate noncompete enforcement actions that accrued before the effective date of the new rule.

What obligations does the new rule create for employers?

Employers will be required to inform employees who have signed noncompete clauses that those clauses are no longer in effect and will not be enforced.

What else should employers be doing?

As the effective date approaches, employers should review existing agreements or form agreements they regularly utilize, and eliminate noncompete clauses.  Once again, the new rule does not prohibit clauses that prevent solicitation of clients or customers, nor does it probit non-disclosure provisions that protect confidential information or trade secrets.  Employers may continue utilizing these narrower restrictive covenants.

Can the FTC really do this?

That is a good question that many are asking.  Undoubtedly, legal challenges to the FTC’s authority to implement this rule have already been initiated by several business groups, and those challenges will likely reach the United States Supreme Court.  We will monitor these challenges and provide updates as they become available.

Photo by Romain Dancre on Unsplash