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FTC Bans Most New Noncompete Agreements Nationwide

The U.S. Federal Trade Commission (FTC) approved a proposed final rule on April 23, 2024, banning most new noncompete clauses in employment contracts—a sweeping rule affecting millions of workers.

The rule also makes all existing noncompete agreements except for those covering senior executives unenforceable and requires employers to provide notice to current and former workers that their noncompete clauses are no longer in effect. The FTC defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”

The final rule reflects some changes from the original Notice of Proposed Rulemaking, but the substance remains the same. Senior executives as defined in the rule represent “an extremely limited population, which the FTC estimates to constitute fewer than 0.75 percent of all workers.”

The rule is set to go into effect 120 days following its publication in the Federal Register. Enforcement could be further delayed by likely legal challenges. The rule defines “noncompete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.

All current state laws limiting noncompetes would be preempted unless they provide greater worker protection than the FTC rule.

The final rule does not explicitly invalidate other covenants, such as nonsolicitation, nonservicing, nonrecruitment, and nondisclosure clauses. Any challenge to such covenants would need to be evaluated on a case-by-case basis. If the final rule survives, this gray area will certainly provide fertile grounds for litigation.

The FTC stated that noncompete clauses constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The agency estimated that about 20 percent of U.S. workers are bound by a noncompete agreement, with higher figures in industries such as technology and health care.

Next Steps for Employers

Employers concerned about the FTC rule and broader legislative and regulatory efforts to restrict the use of noncompete agreements may look to other options to protect their confidential information and business relationships. This could include nondisclosure and nonsolicitation agreements, though it’s still important to ensure that those agreements comply with local, state, and federal laws.

HCCI's HR Executives and Attorneys bring over 40 years of combined experience, helping customers mitigate risk and stay ahead of regulations. To learn more, feel free to reach out to us and schedule a free consultation call.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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