FTC Votes to Ban Employment Restrictive Agreements

On April 23, 2024, the U.S. Federal Trade Commission voted to implement a nationwide ban on non-compete agreements (“NCAs”). The FTC originally issued a proposed rule in January of 2023, and after receiving more than 20,000 comments from stakeholders, the five FTC commissioners voted on Tuesday by a 3-2 margin to implement a slightly-modified version of the original, proposed Rule. The key points of the final Rule are the following:

• The Rule states that it is an “unfair method of competition” (and a violation of Section 5 of the FTC Act) for an employer to enter into - or attempt to enter into - an NCA, to enforce or attempt to enforce an NCA, or to lead a worker to believe that she or he is subject to an NCA.
• An “NCA” is defined as any agreement or contract provision “that prohibits a worker … from seeking or accepting work in the United States….” Thus, the Rule applies to any agreement or provision that has the effect of inhibiting free movement of workers, including traditional “non-compete agreements,” as well as confidentiality agreements, non-solicit agreements, and non-piracy agreements if those agreements or provisions inhibit the employee’s freedom to take any alternative job.
• The Effective Date of the Rule will be the date that falls 120 days after publication of the Rule in the Federal Register. Such publication is anticipated no later than the end of April.
• The scope of the new Rule is limited by the scope of the FTC’s statutory jurisdiction. Thus, the new Rule does not apply, for example, to many or most banks, airlines, insurance companies, and non-profit entities.
• The prohibition on NCAs applies to such agreements or provisions entered into with any “worker,” including any employee, volunteer, independent contractor, and any other “natural person” who provides a service to a business.
• The prohibition on NCAs bans future NCAs as well as NCAs entered into before the Effective Date of the Rule. For NCAs entered into before the Effective Date, employers must provide clear, written notice to all workers who signed such an NCA (including, but not limited to, all such former employees) that their NCA cannot and will not be enforced against them. Such notice must be provided to all such workers before the Effective Date.
• The Rule allows for two exceptions to the prohibition on NCAs. First, the prohibition does not apply to NCAs entered into with “senior executives” if such NCAs were entered into before the Effective Date of the Rule. A “senior executive” is an employee who holds “a policy-making position” and who earns at least $151,164 per year. However, the prohibition on NCAs does ban NCAs after the Effective Date of the Rule - including NCAs with senior executives.
• The second exception to the ban on NCAs provides that the prohibition does not apply to NCAs signed in conjunction with the sale of a business, a person’s ownership interest in a business, or all or substantially all of the business entity’s operating assets.

Within hours of the FTC vote and announcement, the U.S. Chamber of Commerce issued a press release claiming that the FTC has wildly exceeded its statutory and constitutional authority. The Chamber of Commerce vowed to file suit and seek to enjoin the Rule.

Although the Chamber (and, perhaps, other entities) will initiate litigation seeking to invalidate the new Rule, at this point, employers cannot be certain that such litigation will ultimately succeed. LCOJ’s team of employment lawyers stands ready to answer questions and to otherwise assist any client in preparations for the new Rule.

Written By:
Law Firm of Conway, Olejniczak & Jerry, S.C.