FTC Issues Final Rule Banning Most Non-Competes; Legal Challenges Underway


On Tuesday, April 23, the Federal Trade Commission (FTC) issued a proposed final rule banning most non-compete agreements between an employer and its workers. The Final Rule aims to have a significant impact on the future of employers’ relationships with their workers and their competitors, if it survives the legal challenges it will face. 

The Final Rule will be made effective 120 days after it is published in the Federal Register, which is expected to occur imminently.

Scope of the Final Rule and Limited Exceptions

The Final Rule broadly prohibits Non-Compete Clauses, which are defined as:

A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

In short, a Non-Compete Clause is a contractual term or workplace policy that prevents a “worker” from accepting work or operating a business following the conclusion of the worker’s employment.

Notably, the Final Rule appears to not expressly implicate non-solicitation agreements and similar contracts such as non-disclosure agreements and confidentiality agreements. Nevertheless, the Final Rule makes clear that such agreements can fall within its purview if they have the effect of preventing a worker from beginning a new job or starting a business.

With regard to employers, the Final Rule broadly covers “any natural person, partnership, corporation, association, or other legal entity within the [FTC’s] jurisdiction.” This will generally cover most for-profit employers, but certain employers falling outside of the FTC’s jurisdiction will not be covered.

“Worker” is also broadly defined: 

[A] natural 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.

Consequently, employers cannot avoid the Final Rule by claiming workers are independent contractors, apprentices, or are otherwise non-employees.

Final Rule’s Impact on Existing Non-Compete Clauses

The Final Rule provides that most Non-Compete Clauses entered into prior to the effective date are no longer enforceable. Notably, the Final Rule requires employers to specifically notify each worker with whom they have a Non-Compete Clause that the Non-Compete Clause is no longer legally enforceable. The Final Rule provides specific methods for how that notice must be given, as well as model language for this notice requirement.

The only existing Non-Compete Clauses that are exempt from the Final Rule’s purview are those entered into with “Senior Executives.” A Senior Executive is a worker who: (1) earns at least $151,164 annually, and (2) is in a policy-making position. The Final Rule generally defines a “policy-making position” as:

[A] business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.

Given the limited definition of “policy-making position,” this Senior Executive exemption will likely be a narrow one. Indeed, the FTC estimates that only approximately 0.75% of workers are Senior Executives. Regardless, the Senior Executives exemption will likely be the subject of significant litigation, should the Final Rule survive scrutiny.

Future of Non-Compete Clauses

There are no such exemptions and exceptions for Non-Compete Clauses following the Final Rule’s effective date. Once the Final Rule is effective, covered employers are prohibited from entering into new Non-Compete Clauses, regardless of whether the worker is a rank-and-file employee, an independent contractor, a volunteer, or a Senior Executive. Employers are also prohibited from attempting to enforce any Non-Compete Clauses or representing to any worker that the worker is subject to a Non-Compete Clause, other than those Non-Compete Clauses entered into with Senior Executives prior to the effective date. 

For now, it is unclear whether the Final Rule will survive the plethora of challenges it is already facing. Business organizations such as the U.S. Chamber of Commerce have already filed suit challenging the Final Rule. Nevertheless, employers should review the Final Rule's requirements carefully to determine the impact on their business and the necessary compliance steps, which could include compiling all Non-Compete Clauses for review or other agreements that may have the effect of operating like a Non-Compete Clause under the Final Rule. 

The Final Rule can be accessed here.

For assistance on any of these issues, please contact a member of our Labor & Employment Team.

Jump to Page

This website uses cookies to enhance user experience and to analyze performance and traffic on our website. For more information on our cookie use, see our Privacy Policy.