FTC Adopts Final Rule Banning Most Employee Non-Competes

On April 23, 2024, the Federal Trade Commission (FTC) adopted a much-awaited final rule that essentially prohibits the use of most employee non-compete restrictions nationwide. The final rule prohibits employers from requiring non-compete restrictions and requires rescinding existing non-compete clauses. There is an exception for existing agreements with senior executives, and for non-competes signed as part of the sale of a business.  However, the final rule would broadly apply to any contractual provisions purporting to stop a worker from seeking employment.  The rule becomes effective 120 days after publication and will apply retroactively to existing agreements.

The FTC rule’s preamble states that an employee non-compete restriction “is an unfair method of competition.” The rule defines a non-compete as any contractual term “that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”  The term “worker” is broadly defined and includes independent contractors.  Thus, with this broad definition, employer non-solicitation and confidential/trade secret restrictions could also be implicated under the rule.

For example, a broadly written non-solicitation clause could be construed to prevent the worker from “seeking or accepting employment.”  Or a broadly worded trade secret non-disclosure agreement could be construed to limit a worker enough to fall under the rule. The new rule could also preempt legal authority concerning forfeiture and clawback provisions for deferred compensation plans and arrangements, and impact considerations for such plans established under the Employee Retirement Income Security Act (ERISA).

Employers can consider several options at this point.  Employers have 120 days to comply with the rule.  More likely, expected legal challenges will stay the effective date and it could be years before the rule takes effect, or it could ultimately fail in the courts.  Employers should assess how the rule might impact existing employment agreements and decide if those agreements should be updated. It is not a bad idea for employers to review their agreements anyhow, especially if they’ve been in existence for many years without being updated.  Of course, each employer will need to assess the risk and benefits of the new rule and how to comply and meet its’ legitimate business interests.