Federal Trade Commission Approves Final Rule Banning the Use of Non-Competes

The Federal Trade Commission (FTC) recently approved a final rule (the “Final Rule”) that would ban the vast majority of non-competes between employers and their workers. Here’s what you need to know.

What is a non-compete?

Non-competes, which limit workers from joining or starting rival businesses, are a common practice. In 2021, the Biden administration criticized the practice for limiting worker mobility and depressing wages and directed the FTC to issue rules to curtail to the use of non-competes.

What is the final rule related to non-competes?

Except for some rare cases, the Final Rule voids most active non-competes as of the effective date and forbids employers from creating new non-competes.

Before the effective date, employers have to inform workers who are under a banned noncompete that the limitation is voided and legally invalid.

The Final Rule provides only limited carveouts, including for:

• Non-competes with “senior executives” (those with over $151,164 annual compensation and in a policy making position) that are in place as of the effective date. New clauses with senior executives entered after the effective date are banned.
• Non-competes subject of a cause of action that accrued prior to the effective date.
• Non-competes entered into between a buyer and seller in connection with the sale of a business or ownership interest in a business.

What is the effective date of the Final Rule on non-competes?

The Final Rule is supposed to take effect 120 days after its appearance in the Federal Register, but several legal disputes might postpone or stop it from being enforced.

What action do I need to take now?

Employers should consider reviewing their agreements and evaluate the impact of eliminating the non-disclosure clause(s).

In addition, non-solicitation, non-disclosure, and other types of restrictive covenants should be reviewed, as the ban applies to any employer restriction that has the same functional effect as a noncompete. Finally, employers may want to prepare required notices for non-senior executives so they are ready to be sent prior to the effective date.