A Landmark Shift in Employment Law

On April 23, 2024, the Federal Trade Commission (FTC) made a significant move by issuing its Final Rule, effectively banning non-compete clauses for most workers in the United States. Passed by a narrow 3-2 vote, this decision is set to reshape the employment landscape by enhancing worker mobility and fostering competition in the labor market. The rule was set to take effect on September 4, 2024, barring legal challenges that could delay or alter its implementation.

                                    As of the publication of this blog, the non-compete ban                                       remains uncertain and is not currently being enforced.

Understanding the Rule

The FTC’s Rule classifies non-compete clauses as an “unfair method of competition” under Section 5 of the FTC Act. It prohibits employers from enforcing or entering into non-compete agreements with most employees after the Rules effective date. Employers would also be required to notify affected employees that their non-competes are no longer enforceable. However, the rule does not provide a private right of action, meaning enforcement falls solely under the FTC’s jurisdiction.

A key exception applies to senior executives—those earning over $151,164 annually and holding policy-making positions—who may still be subject to existing non-compete agreements. However, new non-competes are prohibited for all employees moving forward.

Impact on Employers and Employees

For employers, the ban would necessitate a review of existing employment agreements and policies to ensure compliance. Businesses would need to explore alternative methods for protecting trade secrets and proprietary information, such as robust nondisclosure agreements (NDAs) and other restrictive covenants that do not function as de facto non-competes. Employers should also consider retention strategies that do not rely on restrictive covenants, such as competitive compensation and career development opportunities.

For employees, the ban would bring newfound job mobility, allowing them to pursue career advancements without fear of legal consequences. The FTC estimates that the rule would lead to higher wages, increased innovation, and greater startup formation, as workers gain the freedom to leverage their skills and experience more freely.

Legal Challenges and Uncertain Future

Despite its potential benefits for employees, the FTC’s rule is already facing legal pushback. The case of Ryan LLC v. Federal Trade Commission challenges the FTC’s authority to enact the rule, arguing that it exceeds the agency’s statutory mandate and was implemented arbitrarily. With district court rulings split on the issue, the matter could ultimately reach the Supreme Court.

Additionally, the rule’s interaction with state laws adds complexity. While the FTC’s ban supersedes conflicting state laws, it does not override states with stricter worker protections. This creates a fragmented regulatory environment, making compliance more challenging for multi-state employers.

Moreover, with the recent change in the Administration upon the election of President Trump, Andrew Ferguson was named the Chairman of the FTC. This is important because he has been known to oppose the ban of non-compete clauses, and it is also likely that the new fifth member of the FTC to be appointed by President Trump will have the same views on the matter.

It is important to note that because the ban has been rejected and found to be unlawful, the FTC could always withdraw its appeal, ultimately killing the ban instead of exhausting its appeals and waiting for a final determination.

State-Specific Non-Compete Bans

Several states have already enacted laws that restrict or outright ban non-compete agreements, including:

• • Complete Non-Compete Bans: California, North Dakota, Minnesota, and Oklahoma prohibit non-compete agreements for nearly all employees.
  • Bans for Low-Wage Workers: Many states restrict non-competes for employees earning below a certain wage threshold, including Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, and Washington.
  • Florida’s Position on Non-Competes: Florida enforces non-compete agreements more strictly than many other states. While the state allows non-competes, they must be reasonable in duration, geographic scope, and legitimate business interest. Florida courts generally uphold these agreements if they meet statutory requirements under Florida law.

Preparing for Compliance

Given the ongoing legal uncertainties, employers should stay proactive in preparing for potential enforcement. Steps to consider include:

• • Reviewing and revising employment agreements to remove non-compete clauses where necessary.
  • Strengthening alternative protections, such as trade secret policies and confidentiality agreements.
  • Informing employees of their rights under the new rule to ensure transparency and compliance.
  • Monitoring legal developments closely, as court rulings could impact the final implementation of the ban.

Conclusion

Although not currently being enforced, if implemented, the FTC’s non-compete ban would mark a transformative shift in employment law, with far-reaching implications for businesses and workers alike. While the rule aims to promote fair competition and economic growth, legal uncertainties remain a critical factor. Employers must stay vigilant, adapting their strategies to remain compliant in case the ban is implemented while safeguarding their business interests.

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This Blog was written by Founding Attorney, Katelyn Dougherty.

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