Noncompete agreements banned for almost all employees

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Federal judge strikes down ban on noncompete agreements

The Federal Trade Commission (FTC) narrowly voted on April 23 to ban nearly all noncompete agreements. Noncompetes are employment agreements that prohibit workers from leaving an employer and going to work for a competing business or launching a competing business of their own.

The final rule will become effective 120 days after publication in the Federal Register.

Rule background

In January 2023, the FTC proposed a rule generally prohibiting employers from imposing noncompetes on their workers. In the 15 months that followed, the federal agency received more than 26,000 comments on the proposed rule, with more than 25,000 of those comments supporting the proposed ban.

FTC statistics on noncompetes

The FTC estimates that 18 percent of U.S. workers are covered by noncompete agreements, which adds up to about 30 million people.

Under the FTC’s new rule, existing noncompetes for most of those workers will no longer be enforceable. Existing noncompetes for senior executives earning a total annual compensation of at least $151,164 can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.

What the rule means for employers

Under the final rule, employers must provide notice to current and former workers (other than senior executives) who are bound by an existing noncompete agreement that they will not be enforcing any noncompetes against them. The FTC has included model language in the final rule that employers can use to communicate with workers on paper, or by mail, email, or text, stating that the employer will not enforce any noncompete clause against the worker.

The FTC also outlined alternatives to noncompetes that enable employers to protect their investments without having to enforce a noncompete. These alternatives include trade secret laws and non-disclosure agreements (NDAs) which both provide employers with ways to protect proprietary and other sensitive information. The FTC estimates that more than 95 percent of workers with a noncompete already have an NDA.

The FTC also stated that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.

Court challenges expected

The U.S. Chamber of Commerce has announced that it will sue the FTC to block the rule. In addition, a Texas-based company has already filed a lawsuit challenging the rule.

Key to remember: Under a final rule approved by the FTC on April 23, almost all noncompete agreements will be prohibited.