Employers may be losing what has historically been an important tool in protecting their business from unfair competition. On April 23, 2024, the Federal Trade Commission adopted a new regulation that essentially nullifies employer contracts, workplace policies and compensation arrangements that prohibit, penalize or effectively prevent a worker from working elsewhere, with a few limited exceptions. In other words, non-competition agreements will be void and unenforceable going forward.

First, the law is set to go into effect 120 days from the date of its publication in the Federal Register (effective date). So it will become the law sometime in the mid to latter part of August. That is assuming it is not altered, overturned or delayed by legal challenges, of which there are already a couple and certainly more to come.

The law applies to all private sector, for-profit businesses. It basically declares it an unfair method of competition under the FTC Act, i.e. illegal, to enter into a non-compete agreement with any “worker”, to attempt to do so, to attempt to enforce a non-compete or to represent that a worker is subject to one after the effective date. The term “worker” includes not only employees, but also independent contractors, sole proprietors, volunteers, apprentices, interns, externs and anyone who provides services to a covered organization. It is noteworthy that the prohibition applies only to non-competes that are directed to the worker’s conduct AFTER the subject engagement has ended. It does not attempt to limit restrictions on concurrent employment. The rule applies not only to contracts but also to any policy or arrangement that penalizes or prevents a worker from working elsewhere. For example, a deferred compensation arrangement that conditions payment on the person not working for a competitor is also prohibited.

There are three general exceptions to the rule. First, the rule does not prohibit a non-compete in existence prior to the effective date for a “senior executive”, that is, someone who earned at least $151,164 in the prior year and is in a “policy-making position”. That is, someone who has final authority to make policy decisions that control significant aspects of a business entity or common enterprise. This exception does not apply to such non-competes entered after the rule’s effective date.

The ban also does not apply to a restriction entered pursuant to the bona fide sale of a business entity, of a person’s ownership interest in such entity (even a minority interest) or of a sale of all or substantially all of the assets of a business. So non-competes entered in the context of the sale of a business will not be deemed unenforceable by the FTC Rule.

Lastly, the ban does not apply where a cause of action related to a non-compete ACCRUED prior to the effective date.

The scope of these exceptions obviously raises a lot of questions which remain to be answered. Right now, we’re essentially in a holding pattern waiting to see if and when this new rule actually becomes law. In the meantime, employers should consult with counsel and take steps to determine which of their employees who have signed non-competes may qualify for the senior executive exception. Also, if the rule does go into effect in August, employers will be required to notify all of their employees subject to a non-compete prior to that date that the non-compete is invalid. This notice must be in CLEAR AND CONSPICUOUS LANGUAGE.

While it is unclear at this juncture whether and to what extent the FTC’s Final Rule will become law, it is important for employers to be aware of these developments and to consult with their legal counsel to understand how these potential changes will affect them going forward. If you have questions, please feel free to reach out to Scott Centrella, the head of our firm’s employment law practices group at scentrella@dmoc.com.