FTC Bans Non-Compete Agreements—What You Need to Know

Date: May 02, 2024

On April 23, 2024, the Federal Trade Commission (FTC) released a final rule that prohibits employers from using non-compete agreements in most contexts. Though businesses have come to rely on non-compete agreements as an incentive to provide training and bonuses to employees—not to mention ensuring that competitors do not poach employees—the rule declares that non-compete agreements are an unfair method of competition.

NFIB along with other business groups strongly opposed the rule and assert that the FTC is overreaching its statutory authority and that the rule will have harmful effects on trade secrets and small business’s intellectual property rights and discourage employer investment in employee training.

When is it Happening?

The new rule will go into effect 120 days after its publication in the Federal Register—this could be as early as September depending on when the rule is published.

What Does the Rule Require?

Businesses are not allowed to enter into new non-compete agreements with workers—meaning, employees and independent contractors—after the rule goes into effect. The rule also forces businesses to get rid of most existing non-compete agreements by the effective date. Businesses must also notify employees and contractors that their non-compete agreements are no longer enforceable.

There is one exception for non-compete agreements already in effect. Existing non-compete agreements for senior executives remain in effect. The rule defines a senior executive as an employee “in a policy-making position” who makes at least $151,164 annually.

Experts predict the FTC will strictly enforce the new rule. However, it contains a good-faith defense for businesses that have a genuine, reasonable belief that the rule does not apply in their situation.

What are the Consequences of the Rule?

The rule will invalidate existing non-compete agreements and disrupt approximately one-fifth of all employment contracts. It will also make businesses rethink offering perks such as retention bonuses and specialized training. This will make it harder for businesses in certain industries to retain employees, and it could allow competitors to improperly gain valuable trade secrets, business knowledge, and clients by hiring another business’s employees.

What is NFIB Doing to Fight This?

NFIB opposed the rule before it was finalized, reminding the FTC that it does not have the legal authority to eliminate non-compete agreements, which are an area of law traditionally reserved to the states, and that the rule is beyond the scope of the FTC’s authority to engage in consumer protection. NFIB expressed disappointment with the final rule when it was released and will continue to oppose it going forward, including with legal action.

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