The FTC’s New Rule on Non-compete Agreements: What Businesses Need to Know

A non-compete agreement has long been a key tool for companies to protect their interests by preventing employees from working for competitors or starting a competing business after leaving the company.

However, the landscape has shifted dramatically with the Federal Trade Commission’s (FTC) new rule, which bans most non-compete agreements in the United States. Here’s what businesses need to know about this significant change and how to adapt.

Background on a Non-Compete Agreement

Non-compete agreements are contracts designed to prevent employees from engaging in competitive business activities after leaving a company. They are traditionally intended to protect sensitive business information, such as trade secrets, customer names, relationships, and strategic plans. However, these agreements also tend to limit worker mobility and innovation.

Understanding the New FTC Rule

On April 23, 2024, the FTC issued a final rule banning the use of non-compete agreements for nearly all workers. The rule, set to take effect on September 4, 2024, deems non-compete clauses as unfair methods of competition under Section 5 of the FTC Act. This comprehensive ban extends to new non-compete agreements and renders most existing ones unenforceable​​.

FTC Rule

1. Ban on New Non-Competes: The rule prohibits employers from entering into new non-compete agreements with workers, including independent contractors, regardless of their income level or job role.
2. Inability to Enforce Most Existing Non-Competes: Most existing non-compete agreements with workers will no longer be enforceable under the FTC rule. However, non-compete agreements can stay in effect for senior executives who earn more than $151,164 annually and who are in policy-making positions. Senior executives for whom existing non-compete agreements can still be enforced make up less than 0.75% of workers.
3. Notice Requirement: Employers must provide notice to any workers with existing non-compete agreements (other than senior executives) that those agreements will not be enforced against them in the future. The FTC has drafted model language employers can use to aid compliance with the notice requirement.
4. Limited Exceptions: While the final version of the rule generally bans non-competes, it allows for certain exceptions, particularly for persons involved in the bona fide sale of a business.

Implications for Businesses

The FTC’s new rule represents a major shift in employment law, and businesses must take proactive steps to comply and protect their interests. Employers should begin reviewing their non-compete agreements and consider alternative methods to protect their business interests, such as non-disclosure agreements (NDAs) and non-solicitation clauses, which are not covered by the FTC’s ban.

Review Existing Agreements and Provide Required Notices

Businesses should promptly review their current non-compete agreements to determine which ones are no longer enforceable and ensure that notices are provided to affected workers. Consulting with legal experts is crucial to navigate this transition smoothly.

Implement Alternative Protections

Without non-compete agreements, businesses can use other legal tools to safeguard their interests:

• Nondisclosure Agreements (NDAs): These can protect trade secrets and confidential information by preventing employees from disclosing such information to competitors.
• Nonsolicitation Agreements: These agreements can restrict former employees from soliciting clients or colleagues, thereby protecting customer relationships and workforce stability.

Next Steps For Employers

Washington’s new non-compete amendments, coupled with the recent FTC rule, signal a significant shift towards protecting workforce mobility and fair competition. Employers must take proactive steps to ensure compliance, including notifying workers that their existing non-compete agreements will no longer be enforced. Seeking legal advice can help you navigate these changes effectively.

If you’re unsure how these changes impact your business, reach out to a legal expert for personalized advice. The Anderson Hunter Law Firm will gladly assist you in understanding your rights and obligations.