FTC's New Rule: A Major Shift in Noncompete Agreements

Introduction

The Federal Trade Commission (FTC) has taken a decisive step by approving a rule that bans most new noncompete agreements nationwide, impacting millions of workers and signaling a significant shift in employment law. This rule renders all existing noncompete agreements unenforceable, except for those that involve senior executives—a group defined as individuals earning more than $151,164 annually and holding policy-making positions.

Key Points of the FTC's Noncompete Rule

• Definition of Senior Executives: The new rule specifically exempts senior executives from the ban on noncompete clauses, identifying these individuals as those in a high earnings bracket who are involved in policy-making decisions. This category represents less than 0.75 percent of all workers, according to FTC estimates.

• Notice Requirement: Employers are now required to inform current and former employees that any noncompete clauses they were subject to are no longer in effect. This ensures that all parties are aware of the new regulations and their implications.

• Legal Challenges Anticipated: The rule is set to take effect 120 days after its publication in the Federal Register, but it may face delays due to expected legal challenges. The U.S. Chamber of Commerce has already expressed intentions to sue the FTC, citing concerns over the commission's authority.

• Scope of Noncompete Clauses: The rule defines noncompete clauses as any contractual terms that prevent an employee from working for a competing employer or starting a competing business within a certain geographic area and timeframe after their employment ends.

• Impact on Other Agreements: While the rule targets noncompete clauses, it does not affect other types of employment agreements such as nonsolicitation, nonrecruitment, and nondisclosure clauses. These will continue to be evaluated on a case-by-case basis.

• State Law Preemption: The new FTC rule will preempt all current state laws that limit noncompete agreements unless those state laws offer greater protection for workers.

Implications for Employers and the Economy

The FTC argues that noncompete agreements constitute an unfair method of competition, citing their role in suppressing wages and limiting job mobility. By prohibiting these agreements, the FTC aims to enhance economic liberty, increase competition, and promote innovation across industries. Employers will need to revisit their employment contracts and consider alternative methods like nondisclosure and nonsolicitation agreements to protect their business interests.

Conclusion

As the legal battles unfold and the rule's future remains uncertain, employers are advised to consult with legal counsel to navigate the changes and ensure compliance. This rule could fundamentally alter the landscape of employment agreements, providing more freedom for employees to change jobs without restrictions while challenging businesses to find new ways to safeguard their proprietary information and maintain competitive edges.