On April 23, 2024 the Federal Trade Commission (FTC) announced its Final Non-Compete Clause Rule banning most non-compete clauses in the United States. The Rule is set to go into effect on September 4, 2024.

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What are Non-Compete Clauses?

The Rule defines a non-compete clause as a term or condition of employment that prohibits a worker from, penalized 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. This includes a contractual term and written or oral workplace policy.

Rule Summary

The FTC found that non-compete agreements violate Section 5 of the FTC Act because they are an “unfair method of competition.”

In light of this, the Rule prohibits employers from entering into any new non-compete agreements with “workers” after September 4, 2024.  The term “workers” is defined to include both employees and independent contractors and other positions like interns and volunteers. It also applies whether the worker is full-time or part-time.

Beginning on September 4, this prohibition on new non-compete causes includes all levels of employees, including senior executives.

For non-compete clauses already in place, employers may maintain these agreements with “senior executives” which are defined as those with over $151,164 annual compensation and a policy making position.  All other existing non-competes will be unenforceable under the Rule.

The Rule supersedes all state laws that would permit or authorize conduct prohibited by the Rule.

Exceptions

There are three main exceptions to the Rule.

The rule does not apply to non-competes entered into by a person pursuant to the bona fide sale of a business, other person’s ownership interest in a business, or of all or substantially all of a business entity’s operating assets.

The Rule does not apply where a cause of action related to a non-complete clause accrued prior to September 4, 2024.

It is not an unfair method of competition to enforce or attempt to enforce a non-compete if a person has a good-faith basis to believe that the Rule is inapplicable.

Non-Applicability

Additionally, it is important to note that the Rule applies only to those employers under the FTC jurisdiction, which includes most businesses and industries.  There are, however, a few industries such as banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits to whom the rule does not apply.

Also, note that the Rule bans non-compete agreements between an employer and a worker.  It does not address non-compete agreements between two businesses or to non-competes between a franchisor and a franchisee.

Other Types of Agreements Not Effected

The Rule does not apply to prohibit the enforceability and future use of other types of agreements such as non-solicitation agreements or non-disclosure agreements unless these other clauses are written so broadly to have the “functional effect” or a non-compete clause.

Notification Requirements 

The Rule requires employers to provide clear, conspicuous, and individualized notice to all workers subject to non-compete agreement that the workers non-compete clause will not be, and cannot legally be, enforced in light of the Rule.  This must be provided to workers by September 4, 2024.  The Rule provides Model Language employers may use for this notice.

The FTC estimates that nearly 30 million people, roughly 1/5 Americans, is subject to a non-compete clause.

Additional Information

FTC Fact Sheet

Rule Text

Compliance Guide

Litigation

Lawsuits have been filed challenging the Rule.  Two lawsuits were almost immediately filed in Texas, Ryan v. FTC, No. 3:24-cv-00986 (N.D. Tex. Apr. 23, 2024) and Chamber of Commerce of the United States of America v. FTC, No. 6:24-cv-00148 (E.D. Tex. Apr. 24, 2024).  These lawsuits claim that the FTC does not have the authority to pass the Rule and that the Rule itself is unconstitutional.