On April 23, 2024 in a 3-2 vote, the Federal Trade Commission (FTC) issued a rule prohibiting for-profit companies from entering into non-compete agreements with service providers.
What are non-compete agreements?
Non-compete agreements prohibit company employees and service providers from working for competitors or starting their own competing business after they leave the company. The new rule applies to these traditional types of non-compete agreements.
What does this mean for my company?
Existing Non-Compete Agreements
Existing non-compete agreements with senior executives remain enforceable to the extent they are allowed under state law. The rule specifically notes that senior executives are considered to be workers that earn more than $151,164.00 annually, who are in a policy making position. All other non-compete agreements with employees or service providers are unenforceable. Companies must notify past and current workers that any existing non-compete agreements are no longer enforceable before the new rule goes into effect. Companies may use the model language included in the new rule to notify past and current company employees and service providers.
Note that California has already banned non-compete agreements, with the limited exception of non-compete agreements entered into in connection with the sale of a business. The new rule does not prohibit such non-compete agreements.
New Non-Compete Agreements
The ban prevents companies from entering into new non-compete agreements with all employees and service providers, including senior executives.
Looking Ahead
The FTC’s new rule is to go into effect 120 days after it is published in the Federal Register. Companies have until the effective date to comply with the ruling. The U.S. Chamber of Commerce has expressed intent to sue to block the ruling which may delay enforcement.
Other avenues of protection from competition still exist such as restrictions on disclosure of confidential information and trade secrets, which are tools that may be used by companies in lieu of non-compete agreements; however, the intended scope of the rule is quite broad including any written or oral contractual agreement or workplace policy that could prohibit, penalize or prevent a worker from 1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment; or 2) operating a business in the United States after the conclusion of employment.
For assistance relating to the FTC’s new ban on non-compete agreements and what it means for your company, please contact Catherine Edmunds at catherine@edmundslegal.com.
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