FTC Bans Almost All Employee Noncompete Agreements: But Will the Rule Stick?
April 24, 2024
By: Colin A. Walker and Adrian P. Castro
On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) voted 3-2 to implement a final rule that will ban almost all current noncompete agreements and all future noncompete agreements.
Under the new rule employers cannot require new employees to execute a noncompete agreement as a condition of employment. In other words, once implemented the new rule would ban all future noncompete agreements.
With respect to already existing noncompete agreements, with a few exceptions, employers will be required to inform employees that any noncompete agreement they are presently subject to cannot be enforced. One exception is for pre-existing agreements involving “senior executives,” which the rule defines as employees making over $151,164 annually and who are in “policy making” positions. In addition, employees of certain types of nonprofit organizations will also still be subject to their noncompetes. Note that the FTC’s ban does not apply to noncompete agreements involving the sale of businesses.
Once implemented, the rule is expected to impact over 30 million employees, approximately 18 percent of the entire U.S. workforce. The FTC believes this change will lead to additional start up ventures and will allow employees to change jobs more easily and earn more money. The FTC believes the ban will create 8500 startup ventures a year, and raise employee wages by at least $400 billion over ten years.
The rule is not yet effective. First, it must be published in the federal register, a move which may take some time. Second, 120 days must pass following publication in the federal register.
Business groups assert noncompete agreements are necessary for the protection of intellectual property and believe the FTC has overreached. One such lawsuit has already been filed in the U.S. District Court for the Eastern District of Texas by the U.S. Chamber of Commerce. As such, it is unlikely the rule will immediately go into effect following the expiration of the 120-day period, as the court will likely stay implementation of the rule pending the legal challenge.
Accordingly, employees should not immediately violate any pre-existing noncompete agreements, as they are still enforceable. Employers can continue to require noncompete agreements as a condition of employment, but they should monitor progress on the implementation of the rule in the event it is ultimately upheld. Colorado employers are cautioned that Colorado state law places significant restrictions on noncompete agreements, including potential criminal and civil penalties, and are advised to seek legal counsel if they wish to implement noncompete agreements with employees.
Many employers utilize noncompete agreements to protect trade secrets and other valuable confidential information. Employers can continue to do so through nondisclosure agreements and confidentiality agreements, so long as they adhere to applicable state law. Colorado employers are advised to seek counsel on these subjects to ensure adherence to state law. Furthermore, the new rule does not impact the enforceability of state and federal trade secret protection laws, which subject employees to serious liability in the event they attempt to misappropriate employer trade secrets.