On April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to approve a final Noncompete Rule which will ban non-compete agreements for all new workers, including senior executives, after the Rule takes effect. The final Rule effective date is 120 days after the rule has been published in the Federal Register which has not been scheduled yet. For senior executives, existing noncompetes can remain in force. For all other employees, existing noncompetes are not enforceable.
About The Final Noncompete Rule
Noncompetes block workers from working for a competing employer, or starting a competing business, after their employment ends. Executive Order 14036, titled Executive Order on Promoting Competition in the American Economy was signed July 9, 2021 and directed over a dozen federal agencies, including the FTC, to curtail anti-competitive practices. Specific initiatives in the executive order include efforts to limit non-compete clauses.
Under the final Noncompete Rule, the FTC “adopts a comprehensive ban on new noncompetes with all workers, including senior executives. The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into noncompetes with workers.” Section 5 refers to Section 5 of the Federal Trade Commission Act (FTC Act) (15 USC 45) which prohibits ‘unfair or deceptive acts or practices in or affecting commerce’.
Once the rule becomes effective:
- There will be a comprehensive ban on new noncompetes with all workers, including senior executives.
- Existing noncompetes can remain in force only for senior executives which, according to the FTC, will affect fewer than 1% of workers.
- “Senior executive” is defined as workers earning more than $151,164 who are in a “policy-making position.”
- Existing noncompete agreements with workers other than senior executives will not be enforceable.
Definitions In the Final Rule
As defined by the Rule:
- Business entity : a partnership, corporation, association, limited liability company, or other legal entity
- Non-compete clause:
- A condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- operating a business in the United States after the conclusion of the employment that includes the term or condition.
- term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
- Worker: a person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.
- Officer: a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any natural person routinely performing corresponding functions
- Policy-making authority: final authority to make policy decisions that control significant aspects of a business
- Senior executive: a worker who:
- Was in a policy-making position; and
- Received from a person for the employment:
- Total annual compensation of at least $151,164 in the preceding year; or
- Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
- Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
Total annual compensation may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during that 52-week period.
Steps to Comply with the Noncompete Clause Rule when it takes effect
Per the FTC’s Guide for Businesses and Small Entity Compliance, affected businesses:
- Should not include noncompetes in future employment contracts, paperwork, websites, employee handbooks or workplace policies.
- For any active noncompetes, give notice to those current and former workers who are not senior executives that their noncompetes are unenforceable using the FTC provided model notice or use your own. Notices can be delivered by email or text message, or deliver a paper notice by hand or mail. If you do not have any contact information for a former worker, you do not have to send the notice.
- Do not enforce existing noncompetes going forward for workers other than senior executives. Per the Rule, a business can still enforce an existing noncompete with a senior executive and still enforce a claim that a noncompete was breached before the Rule’s effective date.
Sample Notice (English)
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at www.ftc.gov/noncompetes.
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