By: Mike Castle
Noncompete clauses have become a common feature in employment contracts in recent years. These clauses prevent employees from working for a competitor or starting a competing business after leaving their current job. On April 23, 2024, the Federal Trade Commission (FTC) ruled restricting their use. The rule, which can be found here, states that noncompete clauses are illegal and unenforceable if they prohibit employees from engaging in lawful competition after leaving their jobs. The ruling will go into effect 120 days after it is published in the Federal Register (which has not yet happened).
The FTC’s rule will apply to nearly all employers who use noncompete clauses in their contracts. The rule aims to protect employees’ ability to seek better job opportunities and promote healthy competition in the marketplace. By preventing employers from using noncompete clauses to restrict competition, the FTC hopes to encourage innovation and entrepreneurship. Some exclusions are banks and common carriers.
What about an existing noncompete?
Existing noncompetes are classified into two categories:
- “Senior Executives” make more than $151,164 annually and are in a policy-making position. Less than 1% of employees are expected to be in this category
- “Others” Employers cannot enforce noncompetes with any employee not classified as a Senior Executive. They are also not permitted to enter into new noncompetes with employees, with minor exceptions regarding trade secrets.
In addition, the FTC has indicated current employees with noncompetes should be notified that their noncompetes are not enforceable. The FTC has provided example language in the Small Business Compliance Guide, which can be found here.
What about new noncompetes?
After the effective date, noncompetes are not permitted for any type of employee, including Senior Executives. Noncompetes between businesses or as part of a business sale are still permitted and excluded from the ruling.
When will the FTC ban noncompetes?
The final rule will become effective 120 days after publication in the Federal Register. Publication is expected soon, though the exact date has yet to be determined. The ruling is expected to face legal challenges, including arguments questioning whether the FTC has the legal authority to implement this rule. In addition, the U.S. Chamber of Commerce is expected to file a lawsuit with the FTC.
Next Steps
At the current time, we suggest you stay up to date on the current guidance but do not make changes to any agreements until the rule is published in the Federal Register. Wiss will continue to share updates on the rules as they become available.
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