The Federal Trade Commission (FTC) Seeks to Ban Noncompetes in a Sweeping New Rule

What is a Summary of the FTC Rule Banning Noncompetes?

On April 23, 2024, the Federal Trade Commission (FTC), which is an agency of the United
States Federal Government, passed a final rule which would ban most employee non-compete
agreements in the US. The final rule allows existing noncompetes for “senior executives” to
remain effective, but employers cannot create or enforce new noncompetes with senior
executives. A “senior executive” under the final rule is defined as a worker making over
$151,164 per year and who is in a policy-making position.

This $151,164 annual amount includes “salary, commissions, nondiscretionary bonuses and
other nondiscretionary compensation,” but does not include “board, lodging, or other facilities,”
or “payments for medical insurance, life insurance, retirement plan contributions, or the cost of
other similar fringe benefits.”

The noncompete rule also requires employers to send a written notice to workers for existing
noncompete clauses that the employer will not enforce the noncompete clause against the
employee. The FTC rule provides a sample notice for employers to use.

Who is Covered by the FTC Noncompete Rule?

The FTC’s noncompete rule covers not just traditional employees, but also independent
contractors, externs, interns, volunteers, apprentices, or sole proprietors that provide a service.
The FTC noncompete rule applies to all persons, including any “natural person, partnership,
corporation, association, or other legal entity within the [FTC’s] jurisdiction, including any person
acting under color or authority of State law.”

Who is Exempt from the FTC Noncompete Rule?

The FTC noncompete rule exempts “senior executives” who are already bound to noncompete
agreements – the rule defines “senior executives” as those who are making over $151,164
annually and who are in a policy-making position. The rule also exempts franchisor and
franchisee noncompetes, and noncompetes pursuant to the sale of a business, or of an
ownership interest in a business.

When Will the FTC Noncompete Rule Be Published in the Federal Register?

The FTC noncompete rule will become effective 120 days after publication in the Federal
Register. On April 23, 2024, the Federal Trade Commission (FTC) passed a final rule which
would ban most employee non-compete agreements in the US.

How Does the FTC Rule Relate to State Noncompete Laws?

The FTC rule, once effective, will supersede state laws that violate it. While many states have
passed laws that prohibit noncompete clauses in whole or in part, the FTC noncompete rule
purports to get rid of noncompetes entirely except for those that apply to senior executives that
were enacted before the final rule, noncompetes pursuant to the sale of a business, and those
between a franchisor and franchisee.

What Should Employers Do To Comply with this FTC Noncompete Rule?

Employers should keep a close eye on when the rule will go into effect – 120 days after
publication in the Federal Register. The rule will likely be subject to litigation that could delay or
prevent its enactment. If the rule becomes effective, employers should comply with the notice
requirements, and conduct an audit of present noncompete agreements to ensure compliance
with the law.

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