How Will the Law Regarding Non-compete Agreements Change in 2024?

New Law Bans Non-Compete Agreements Nationwide

On April 23, 2024, the Federal Trade Commission issued a final rule to promote competition by
banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation. “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC.

Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the
freedom to pursue a new job, start a new business, or bring a new idea to market.”
What Are the Key Provisions of the Rule?

What Are the Key Provisions of the New Rule?

The rule prohibits employers from entering into, enforcing, or attempting to enforce post-

employment non-compete agreements with workers. The rule:

• Defines a non-compete clause as one “that prevents 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” and “that prevents a worker from operating a business in the United States after the conclusion of the employment that includes the term or condition.” 
• The proposed rule is notable in that it:
  • Is not limited to non-competes with employees but includes all workers,

including independent contractors; 

• Bans “de facto” non-competes without clearly defining what they are.

• When effective, the rule requires employers to:
  • Provide notice to workers bound to an existing non-compete that the non-compete agreement will not be enforced against them in the future.
  • To aid employers’ compliance with this requirement, the Commission has included model language in the final rule that employers can use to communicate to workers
  • In regards to senior executives:
    • Existing noncompetes for senior executives can remain in force
    • Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives
    • The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

• •Supersedes any state law contrary to the non-compete ban, but not any law providing greater protections for workers.
• The final rule will become effective 120 days after publication in the Federal Register.

Are There Any Exceptions to the Non-Compete Ban?

The Commission found that employers have several alternatives to noncompetes that still

enable them to protect their investments without having to enforce a non-compete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-

established means to protect proprietary and other sensitive information.

Alternatives include:

• Restrictive covenants other than “pure” non-competes. The non-compete ban is limited to traditional “pure” non-competes. It does not per se prohibit other restrictive covenants, such as customer or employee non-solicits, unless they are so broad that they function as a “de facto non-compete.”
• Confidentiality agreements. The proposed non-compete ban similarly does not per se prohibit confidentiality agreements unless they are so broad that they functionally prevent a worker from working in the same field for another employer or in business for themselves. Researchers estimate that over 95% of workers with a noncompete already have an NDA.
• Fixed-term employment contracts. The Commission relatedly clarifies that fixed-duration employment contracts, i.e., contracts between employers and workers whereby a worker agrees to remain employed with an employer for a fixed term, and the employer agrees to employ the worker for that period, are not non-compete clauses under the final rule because they do not restrain post-employment conduct.
• Concurrent employment restraints. The Commission declines to extend the reach of the final rule to restraints on concurrent employment. Although several commenters raised this issue, the evidentiary record before the Commission at this time principally relates to post-employment restraints, not concurrent employment restraints.
• Sale of business non-competes. The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.
• Claims arising prior to the final rule. In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.

Is the Rule Retroactive?

Yes and no. The final rule is not impermissibly retroactive because it does not impose any legal
consequences on conduct predating the effective date. The Commission is not creating any new
obligations, imposing any new duties, or attaching any new disabilities for past conduct. To
minimize concerns about retroactivity, the Commission adopts § 910.3(b), which states that the
final rule does not apply where a cause of action related to a non-compete accrues before the
effective date. The notice requirement in § 910.2(b) likewise does not render the final rule
impermissibly retroactive because that requirement merely requires notice that non-competes that
exist after the effective date will not be enforced in the future with respect to workers other than
senior executives. No penalties attach to persons who entered non-competes before the effective
date. Moreover, the Commission notes that non-competes were already subject to case-by-case
adjudication under section 5. Employers were thus already responsible, even before the final rule,
for ensuring their non-competes are not unfair methods of competition.

Does the FTC Have the Authority to Make This Rule?

Section 5 of the FTC Act allows the FTC to prevent unfair competition and deceptive practices.

Traditionally, non-compete agreements have been regulated at the state level. In the final rule, the
Commission has determined that it is an unfair method of competition and, therefore, a violation
of Section 5 of the FTC Act for employers to enter into noncompetes with workers and to enforce certain noncompetes.

The Commission found that noncompetes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. The Commission also found that noncompetes tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. There is also evidence that
noncompetes lead to increased market concentration and higher prices for consumers.

Lastly, the Commission found that instead of using noncompetes to lock in workers, employers
that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.

What Should Employers Do Now?

Employers should stay updated on evolving state non-compete laws, especially regarding remote

workers. Review existing non-compete agreements and ensure compliance with applicable laws.

Consider conducting a trade secret audit and creating non-disclosure agreements to enhance protection measures. Employers should proactively adapt to the evolving landscape of non-compete regulations.

For guidance and counsel regarding this new FTC rule, please contact the Law Offices of Shannon C. Smith, PLLC, at 859-710-9001 to schedule a consultation.