SKIP TO CONTENT
Federal Trade Commission Final Rule Banning Non-Compete Clauses
The Federal Trade Commission issued its final Non-Compete Clause Rule on April 24, 2024, with an effective date of 120 days after publication in the Federal Register. Federal Trade Commission, Final Rule, Non-Compete Clause Rule, Federal Register, RIN 3084-AB74, (to be codified at 16 C.F.R. Part 910), Non-Compete Clause Final Rule (ftc.gov) (last accessed on 5/2/2024). It bans non-compete clauses in employment. The highlights are as follows:
- A non-compete clause is defined broadly as a term or condition of employment that prohibits a worker, penalizes a worker for, or functions to prevent a worker from seeking or accepting work after conclusion of employment, or operating a business after conclusion of employment. Therefore, not only is an express non-compete clause banned, but its functional equivalent is also banned.
- The category of worker the ban applies to is broad and includes an employee, independent contract, extern, intern, volunteer, apprentice, or sole proprietor.
- The ban applies retroactively except for a bona fide sale of a business entity or a cause of action relating to a non-compete that has accrued prior to the effective date.
- Notice is required to current and former workers with non-compete clauses, informing them that the clause is invalid.
- There is an exception for current or past Senior Executives until the effective date of the Rule.
- State law is preempted.
Legal Challenges to the validity of the Rule have been made and more are expected in the near future. Litigation on the application of the Rule is also anticipated. Non-solicitation, non-disclosure of trade secrets, and other similar employment agreement clauses are not banned. However, caution needs to be taken that these clauses are not deemed the functional equivalent of a non-compete clause. Although the Rule is not effective until 120 days after publication, employers need to take steps now to review employment agreements and determine the need for the required notices. Other types of employment clauses, for example non-solicitation and non-disclosure clauses, will need to be examined to determine whether they are the functional equivalent of a non-compete clause. Lastly, it may be beneficial for employers to examine potential different employment clauses moving forward to provide as much protection as the Rule allows.