BANNING NONCOMPETE AGREEMENTS
*** For Immediate Release – April 24, 2024 ***
The Federal Trade Commission (FTC) issued on April 23, 2024, its final rule (Rule) pursuant to which it bans noncompete agreements nationwide. This Rule will directly impact millions of businesses and as many as thirty million workers. The Rule generally does not apply to non-profit organizations.[1]
Noncompete agreements are typically a part of employment agreements between a worker and employer, or buy-sale agreements between the buyer and seller of a business. The Rule provides an exception for the latter arrangements. As to the former, a worker is usually asked—contingent upon becoming employed or remaining employed—to agree for some period following termination of employment to forego being in direct or indirect competition with the employer. Most states require the noncompete agreements to be reasonably limited in time (no more than two to three years) and geographic scope (such as a 60-mile radius from the locale in which the worker performed their duties).
The Rule will take effect 120 days from the date of its publication in the Federal Register (Effective Date). As of the Effective Date, all noncompete agreements, except those of “senior executives,” shall terminate and be unenforceable. The Rule defines “senior executives” as those in policy-making positions who earn more than $151,164 per year. Upon the Effective Date and thereafter, no employer may enter into any new noncompete agreements with any worker,[2]including senior executives.
Employers have an obligation to notify those workers whose noncompete agreements are no longer enforceable that their noncompete agreements are no longer in effect and will not and cannot be enforced. The notice must also identify the person or entity that entered into the noncompete with the worker. The employer must deliver the notice in writing to the worker by hand delivery, by mail or email to the individual’s last known mail or email address, or by text message to the individual’s mobile phone number.
Violations of the Rule are deemed to be engaging in unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45).
NOTE: The U.S. Chamber of Commerce and other plaintiffs filed suit on April 24, 2024, in federal court in Tyler, Texas seeking to have the Rule declared unconstitutional and to block its enforcement. Accordingly, while employers should be preparing to exercise compliance with the Rule, it is best to not prematurely announce to workers that their noncompete agreements are no longer enforceable, pending a decision from the federal court in Texas or other federal courts where the Rule will likely be challenged. You should seek legal advice as to whether a particular court decision relating to the Rule will shield your business from mandatory compliance with the Rule.
Please feel free to contact the attorneys at Watson Spence LLP if you have any questions concerning the new FTC Rule or its enforcement.
[1] The FTC emphasizes, however, that not all organizations claiming tax-exempt status are deemed exempt. Non-profit entities should review the criteria set forth in the FTC’s comments to the Rule to determine whether the particular entity is exempt from the Rule.
[2] The Rule uses the term “worker” as opposed to employee, and defines “worker” broadly as any “natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”