The Federal Trade Commission Votes to Ban Non-Compete Agreements With Limited Exceptions

The FTC’s final rule defines a “non-compete clause” as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person or employer where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” See 16 C.F.R. § 910.1.

The FTC’s final rule places a comprehensive ban on new non‑compete agreements with for-profit employers and applies to workers (paid or unpaid) and independent contractors. Under the final rule, for-profit employers cannot enter into new non-compete agreements with workers or represent to workers that they are subject to a non-compete agreement or policy.

With respect to existing non-compete agreements, only non-compete agreements between employers and “senior executives” remain enforceable. The rule defines a senior executive as a worker who is in a policy-making position and earned an annual compensation of more than $151,164. See 16 C.F.R. § 910.1. Existing non-compete agreements with workers not qualifying as senior executives are no longer enforceable. Pursuant to the final rule, employers must notify all current or former workers not qualifying as senior executives that any existing non-compete agreements are no longer enforceable. The FTC imposes specific requirements and proposes model language for this notice. See 16 C.F.R. § 910.1(b)(2); § 910.1(b)(4).

Notably, the FTC’s final rule does not apply to non-compete agreements entered into as a result of a bona fide sale of a business or any pending lawsuits asserting causes of action related to non‑compete agreements occurring prior to the effective date of the rule. Since the FTC Act does not apply to nonprofit corporations, the final rule also does not apply to non-compete agreements between workers and nonprofit corporations.

The FTC estimates that its final rule will result in a 2.7% increase in new business formation each year, higher earnings for workers (which it estimates will average $524 per year for the typical worker), lower health care costs (by up to $194 billion over the next decade), and increased innovation (with an estimated 17,000 to 29,000 more patents per year over the next 10 years).

Ultimately, the FTC’s final rule, if not enjoined, will become effective 120 days after its publication in the Federal Register. Employers subject to the FTC Act have until the effective date to comply with the final rule’s provisions. Lawsuits seeking to enjoin the FTC’s final rule, including one led by the U.S. Chamber of Commerce, are pending.

If you have any questions about the FTC’s final rule and how it may affect your business, please contact the authors of this alert.