The Federal Trade Commission (FTC) voted 3-2 on Tuesday, April 23, 2024 to ban noncompete agreements that prevent employees from working for competitors or starting a competing business after they leave a job. The final rule is scheduled to go into effect 120 days after it is published in the Federal Register.
The final rule would ban new noncompete agreements for all workers and require companies to let current and past employees know they won’t enforce them. Companies will also have to throw out existing noncompete agreements for most employees, although in a change from the original proposal, the agreements may remain in effect for senior executives.
What’s in the Final Rule?
- The final rule bans new noncompetes with all workers, including senior executives after the effective date.
- Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.
- For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule.
- Fewer than 1% of workers are estimated to be senior executives under the final rule. Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
What’s Next?
Warner Norcross + Judd LLP labor and employment litigator Dean Pacific told Crain’s Grand Rapids Business to expect court challenges. “Very quickly, it’s going to be the subject of litigation,” Pacific told Crain’s. “It’s such a sweeping regulation of the economy.”
He went on to say, “There’s good reason to believe the court might agree with the folks that say this is an overreach by the agency and they don’t have the authority to pass a rule like this, a rule this sweeping.”
SBAM opposed the ban on noncompete agreements, and issued a Call to Action on this in March 2023.