FTC Non-Compete Ban: What Employers Need to Know

On April 23, 2024 the Federal Trade Commission (“FTC”) issued a final rule and voted to end employee non-competition agreements nationwide. According to the FTC’s final rule, a non-compete clause is an agreement term that prevents a worker, including independent contractors, from working in the U.S. for a different entity after the worker’s employment ends.

Noncompete agreements are governed by state law and are specific to each state. Some states have banned nearly all noncompete agreements while other states, like Florida, allow non-compete agreements that place significant restrictions on an individual’s employment options after leaving an employer. Florida law permits employers to bind employees who are residents of Florida to highly restrictive, employer-friendly agreements. But even states that permit significant restrictions do not permit boundless restrictions.

The following are some questions the firm has received.

Q: When does this FTC rule take effect?

A: The rule is scheduled to take effect on September 4, 2024, 120 days after its publication in The Federal Register. However, within hours of the FTC announcing its decision, multiple lawsuits were filed in various jurisdictions seeking to prevent the enforcement of the rule.

Q: Are there any exceptions to the use of non-compete agreements?

A: Yes, the rule provides exceptions for just a few industries (banks, credit unions, common carriers, are a few). Additionally, the rule does not apply to senior executives who are bound to current agreements, but it will apply to future agreements. “Senior executive” is defined within the rule and may or may not apply to the executives within your organization.

Q: How do current state laws affect this rule?

A: Several states have enacted legislation restricting the use of non-compete agreements for their residents even if they work for an employer in another state. For example, a non-compete agreement drafted under Florida law and issued by a Florida employer to an employee residing in New York is unlikely to be enforced to the extent that it exceeds the restrictions allowed under New York law. These state laws will still apply prior to the rule taking effect, and if more restrictive than the FTC would continue to apply.

Q: Does the FTC rule permit non-competition agreements for current employees?

A: Yes. There is no prohibition regarding non-competition during an employee’s employment.

Q: Are non-solicitation and confidentiality/non-disclosure agreements permitted under the FTC rule?

A: Non solicitation clauses function to prevent a former employee from soliciting customers and employees after employment ends. Confidentiality clauses function to keep highly confidential company information - including trade secrets - confidential. Under the FTC rule, both types of clauses are permitted unless they are so broad or onerous as to effectively function as non-compete clauses.

What does this mean for employers?

Employers should plan as though the rule will take effect in September, but wait to implement any those plans until the earlier of the Rule taking effect on September 4, or the resolution of the litigation challenging the rule. Employers may:

• continue using non-compete agreements judiciously. Consider whether employees performing specific roles really have the potential to significantly harm your business by joining a competitor. For example, you may feel it’s prudent to issue non-competes to sales persons but not to administrative staff.

• consider issuing non-solicitation and confidentiality/non-disclosure agreements for all employees. Review those agreements to ensure they are narrowly tailored and do not violate the FTC rule.

• verify whether their current agreements comply with state law. Even states that allow broad non-compete and other restrictive covenants, have limitations. Agreements that go beyond what is permitted run the risk of being unenforceable regardless of the FTC rule.

If employees are asking about whether their current agreements are still in place, let them know that complying with the law is a top priority for your company and you will keep them informed as you learn more about the rules governing employee agreements. However, for now, current agreements remain in effect as do your employees’ obligations to abide by them.

If you have any questions on how these laws affect you or your business please don’t hesitate to reach out: Terri@BarbasCremer.com.