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FTC Bans Non-Compete Agreements


FTC Bans Non-Compete Agreements

 

On April 23, 2024, the Federal Trade Commission (FTC) announced its Final Non-Compete Clause Rule (“Non-Compete Ban”), which states that it is an unfair method of competition for persons to enter into non-compete agreements with workers on or after the Non-Compete Ban’s effective date. The Non-Compete Ban will ban almost all non-competition agreements in the United States. The Non-Compete Ban’s effective date is September 4, 2024.

 

What Are Non-compete Agreements?


Non-compete agreements are contracts that prevent employees from working for competitors or starting a similar business for a specified period after leaving their current job. These agreements have long been a staple in a variety of industries, from tech to healthcare, and were originally designed to protect trade secrets and investment in employee training. However, they often have the unintended consequence of limiting workers’ career mobility and suppressing wages.

Why is the FTC Taking Action?


The FTC’s decision to ban noncompete agreements stems from concerns that these contracts stifle competition, hinder innovation, and unfairly limit workers’ opportunities. The FTC determined that non-compete agreements are frequently used to suppress wages and keep employees from pursuing better job opportunities, rather than solely to protect legitimate business interests.


Who is Included in the Non-Compete Ban?


The Non-Compete Ban applies to all workers. For purposes of the Non-Compete Ban, the term “worker” has a broad definition of any natural person who worked or previously worked for another person. The term “worker” can include employees, independent contractors, interns, volunteers, apprentices, a sole proprietor, or any other natural person who provides services. The Non-Compete Ban will not apply to existing non-compete agreements for senior executives. However, the exclusion for senior executives applies only to non-competes entered into before September 4, 2024. After September 4, 2024, the Non-Compete Ban does not allow any new non-compete agreements with a senior executive.


Key Points of the Non-Compete Ban


The FTC believes that the Non-Compete Ban will allow employees the freedom to leave their current jobs and immediately seek employment with competitors or start their own businesses without fear of legal repercussions. By removing the constraints of non-compete agreements, the FTC anticipates that workers will have more leverage to negotiate higher wages and better benefits. The FTC further believes that a more fluid labor market will foster innovation, as ideas and expertise flow more freely between companies and industries.


The FTC’s move to ban non-compete agreements is not without controversy. Some business leaders argue that non-compete agreements are essential for protecting intellectual property and maintaining a competitive edge. However, the FTC maintains that other legal mechanisms, such as nondisclosure agreements and trade secret laws, can sufficiently protect these interests without restricting workers' mobility.

 

Looking Forward

 

The September 4, 2024, effective date is fast approaching. However, there are already pending lawsuits against the FTC seeking a stay or injunction against the Non-Compete Ban. A decision on the preliminary injunction filed in the Northern District of Texas will potentially be determined on July 3, 2024. It is possible that the September 4, 2024, effective date is delayed based upon the outcome of the lawsuits or the Non-Compete Ban is invalidated. If the Non-Compete Ban is implemented it would preempt state laws that are inconsistent with the Non-Compete Ban. It is imperative to continue to monitor the status of the Non-Compete Ban and plan accordingly.


This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes. Consult with your legal or tax advisors before implementing any suggestion contained herein. Ms. Soyer is a shareholder with the firm of Sandra L. Clapp & Associates, P.A. and can be reached at ksoyer@clapp-legal.com or (208) 938-2660.

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