FTC Issues Sweeping Ban of Non-Compete Clauses in Employment Contracts
On April 23, 2024, the FTC voted to ban most non-compete clauses in employment agreements. The new rule will take effect 120 days after it is published in the Federal Register. The rule rescinds most existing non-competes and bans non-competes going forward. Employees who are under existing non-competes must be given notice by the employer that their non-compete cannot legally be enforced after the effective date.
There are exceptions to the new rule. The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. The rule also allows employers to maintain existing non-competes with “senior executives” (those with compensation in excess of $151,164 and in a policy making position for the company). It is also important to note that the new rule does not ban non-disclosure agreements, customer non-solicitation agreement, or employee non-solicitation agreements, unless such agreements have the same functional effects as non-competes. In that case, such agreements would be prohibited.
Numerous commentators have pointed out that challenges to the new rule have already been filed. Additional challenges are expected. Some have speculated that the new rule will not survive judicial scrutiny. For this reason, many experts are recommending that employers hold off on giving the required notice for existing non-competes. Employers have 120 days after publication of the new rule in which to give employees notice.
If you have clients who you know will be affected by these new rules, you may wish to make them aware of the new rules. If you have any form language in your existing employment agreement templates, you might want to remove that now. You should also familiarize yourself with the “senior executive” exception and the other exceptions for non-disclosure agreements and non-solicitation agreements.
We will continue to monitor the challenges to the new rule and will provide updates as they become available.
For additional details and guidance concerning the new rule, see the following posts from North Carolina law firms:
Client Alert: FTC Bans Non-Compete Clauses in Employment Contracts - Manning Fulton
FTC Charges Forward with Sweeping Non-Compete Ban - Ward and Smith, P.A.
The New FTC Rule Banning Non-Competes: FAQs - Cranfill Sumner... (cshlaw.com)
