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On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a final rule to prohibit noncompete clauses for most employees, effective September 4, 2024. The FTC aims to promote competition by protecting workers' job mobility, boosting innovation, and encouraging new business creation.
A noncompete clause is a contract term that restricts a worker from joining a competitor or starting a similar business within a specific area and time frame after leaving their job. The enforceability of such clauses is currently determined by state laws and courts. In January 2023, the FTC proposed a rule to regulate noncompete clauses at the federal level. The final rule was issued on April 23, 2024, to take effect on September 4, 2024.
The FTC has voted to ban most noncompete clauses, including new ones for all workers except senior executives. The rule applies to current and former workers, prohibiting post-employment noncompetes but allowing restrictions while employed. The rule does not apply to banks, savings institutions, credit unions, carriers, airlines, and certain nonprofits.
The final rule deems using noncompete clauses in violation as an unfair competition practice under the FTC Act. The FTC can enforce it through actions or litigation. Employees can seek court judgments to invalidate illegal noncompetes, with employers facing additional damages for enforcement attempts.
Employers should audit existing agreements, handbooks, and policies for noncompete clauses that may prevent employees from accepting other job offers.
Employees should be notified by their employers that their noncompete clauses will not be enforced. They can use model language and send it via email to all employees, including former ones.
Employers may explore alternatives to noncompete agreements, such as confidentiality and nonsolicitation agreements, fixed-term employment agreements, and garden leave provisions. It is important to work with local counsel to understand the risks and enforceability of these options.
Employers can enhance employee retention by offering long-term incentives like equity awards or deferred compensation. They may also provide more competitive compensation packages and employee benefits than competitors.
Employers preparing for the FTC's ban on noncompetes should monitor legal challenges and ambiguities in the final rule. Additional clarification may be needed before implementing any changes. Download the bulletin for more details.
Business and Small Entity Compliance Guide