Are Non-Compete Agreements Really Dead?
Right now, they are indeed dead according to a final rule issued by the Federal Trade Commission (“FTC”) on April 23, 2024.
But what is a non-compete anyway, and how does the FTC rule impact regular folks?
A non-compete agreement is often a document that is signed by an employee as a condition of employment in the hiring process which prevents the employee from working for a competitor. Terms in non-competes may include time, geography and industry restrictions, some of which may be written so broadly that they effectively prohibit a worker from gainful employment in the same industry anywhere near where they live. Non-competes are used not only for high earning workers in various industries but also for low-wage earners where they are implicated in disproportionately impacting women and people of color.
Proponents of non-compete agreements claim they protect companies and their confidential information. Opponents of non-compete agreements claim they stifle creativity and entrepreneurship, as well as limit economic opportunity and suppress wages.
The State of California and several other states have banned non-competes statewide, and other states have proposed similar legislation, but this FTC rule is the first national ban on non-competes. Texas does not have a statewide ban on non-competes, so the FTC rule will have a real impact if it stands.
What does it do?
The rule serves as a comprehensive ban on nearly all non-compete agreements or clauses. The rule defines a “worker” as an employee but also includes independent contractors, externs, interns, volunteers, apprentices, or a sole proprietor who provides a service. The rule also defines noncompete clauses not only as terms or conditions of employment that explicitly prohibit a worker from competing with a former employer, but also to mean any other clauses that “penalize a worker for” or “function to prevent a worker from” competing with a former employer. This definition would arguably prohibit clauses that function like non-competes, such as non-disclosure agreements, nonsolicitation clauses, and training repayment agreement provisions, as argued in the Harvard Business Review article: The FTC’s Noncompete Ban Was Long Overdue (hbr.org).
Who does it impact?
It impacts all new non-competes after the effective date, September 4, 2024, except for those in the “carve out” below. Therefore, employers must be in compliance by that time or face enforcement action by the FTC.
What is the “carve out”?
The only non-competes NOT impacted by the rule are existing noncompete agreements with “senior executives” who earn more than $151,164 per year and who are in “policy-making positions.”
What remains to be seen is whether the FTC’s national ban on non-competes will withstand legal challenge. The final rule was adopted pursuant to a 3-2 vote of commissioners, and two commissioners have already spoken out against the rule as an overreach of the FTC’s authority. Several lawsuits have been filed challenging the FTC’s authority. As this is a developing area of employment law, please contact your legal counsel for advice and direction if you are faced with a non-compete issue.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice.
