FTC Issues Final Rule Banning Most Worker Noncompetes

Tara Paulson, Mark Fahleson, Julie Schumacher
Rembolt Ludtke Employment & Labor Law Practice Group

Today the Federal Trade Commission (FTC) approved a sweeping final rule that prevents most employers from using or enforcing noncompetition agreements against employees and independent contractors.

In January 2023 the FTC published notice of its proposed rule and received over 26,000 public comments on the draft, the vast majority of which were in support of a comprehensive ban.  The final rule, approved by a vote of 3-2, varies somewhat from the FTC’s earlier draft and generally prohibits employers from using or enforcing noncompete agreements. Specifically, the FTC’s new rule:

• Bans new noncompetes for all workers, including “senior executives”;
• For existing noncompetes:
  • For “senior executives,” these can remain in force.  “Senior executives” is defined in the rule to mean employees earning more than $151,164 annually who are in a “policy-making position”;
  • For all other workers, enforcement of existing noncompete agreements is prohibited.

The final rule also applies to independent contractors and anyone who works for an employer, whether paid or unpaid.  

A “non-compete clause” is defined in the rule as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The rule is retroactive in that existing noncompetes for workers who do not fall within the definition of “senior executives” are unenforceable and employers must provide written notice to workers that these agreements will not, and cannot legally be, enforced against the worker.

The new rule becomes effective in 120 days after it is published in the Federal Register.  However, business groups, including the U.S. Chamber of Commerce, preemptively announced plans to immediately challenge the new rule in court, a challenge at least one FTC commissioner predicted would be successful.  

Takeaways:

The FTC’s action is part of a growing movement on the federal and state level targeting employment noncompetition and nonsolicitation agreements.  In May 2023 the National Labor Relations Board’s general counsel instructed its investigators that many noncompete agreements infringe on employee rights and are unlawful. Meanwhile, a host of states, including Colorado and Minnesota, have recently passed legislation completely banning or severely limiting the use of non-competes.

The Rembolt Ludtke Employment & Labor Law Practice Group is available to assist employers with questions surrounding agreements and practices that may be impacted by the FTC’s final rule, as well as other issues that arise in the workplace.

This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.

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