On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule to ban employer noncompete agreements (“NCA”) nationwide, protecting workers from disincentives to change jobs, create innovation, and develop new businesses. “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “ NCAs impose contractual conditions that prevent workers from taking a new job or starting a new business upon separation from employment. NCAs may induce workers to switch to a lower-paying field, relocate, leave their chosen career, or defend against employer litigation.
The FTC determined that NCAs are an unfair method of competition, and violate Section 5 of the FTC Act. Under the FTC’s new rule, existing NCAs are no longer enforceable with few exceptions. Existing NCAs for senior executives remain in force under the FTC’s final rule, but employers may not enter into or enforce new NCAs, even for senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. Employers will be required to provide notice to workers (other than senior executives) who are bound by an existing NCA that they will not be enforcing the agreement against them.
All is not lost! There are alternatives to NCAs that still enable firms to protect their investments without having to enforce a noncompete. Trade secret laws and non-disclosure agreements (“NDA”) allow employers to protect proprietary and other sensitive information.
The final rule will become effective 120 days after publication in the Federal Register.
Hunt Ortmann’s Employment Law Group is ready to assist with your notice to employees regarding the enforceability of an NCA and the drafting of compliant NDAs. Please contact the author for further information.
JoLynn Scharrer is a Shareholder at Hunt Ortmann and leads the Firm’s Labor & Employment and Insurance Practice. She can be reached at scharrer@huntortmann.com for further information and assistance.
