The Federal Trade Commission (FTC) voted last month to approve a final rule banning most noncompete agreements between employers and their workers. The final rule is scheduled to go into effect on Sept. 4, 2024, though legal challenges may delay its effective date and FTC enforcement actions.

The Final Rule

The most significant pieces of the final rule are that:

• It makes noncompete agreements with workers an unfair method of competition that violates Section 5 of the FTC Act.
• It defines "noncompete" agreement broadly "as any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from" seeking or accepting employment with another business or operating a business after their working relationship ends.
• It is not limited to employees, but instead covers anyone "who works or who previously worked, whether paid or unpaid … including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor …"
• It prohibits new noncompetes after the effective date, including agreements with highly compensated executives. Pre-existing noncompete agreements with "senior executives," defined as an employee earning more than $151,164 a year in a "policy-making position," will remain in force, but the final rule's definitions suggest this exception is designed to govern a very limited set of executives within companies.
• All other pre-existing noncompetes are void as of the effective date. The final rule requires employers to provide current and past workers notice that they will not enforce existing non\competes, but not to formally rescind noncompete agreements. The final rule includes model language for the notice requirement that businesses can use to comply with this section of the final rule.
• The definition of "noncompete" agreements does not include (and are, therefore, not prohibited by the final rule): noncompetes that prohibit employees from competing against employers during their employment; sufficiently tailored non-solicitation of customers and employees provisions; noncompete agreements entered into in conjunction with  sale of a business; and franchisee/franchisor agreements.

There are important limitations to the final rule based on limitations in the reach of the FTC Act, which does not apply to nonprofits, banks, savings and loan companies, transportation and communications common carriers, air carriers, and some other entities. However, the Federal Deposit Insurance Corp.'s recent bank merger guidelines banned the enforcement of noncompetes for employees at banks of all sizes in certain contexts. FTC Commissioner Rebecca Kelly Slaughter also warned that nonprofits registered as tax-exempt, but organized for the profit of members, would be subject to the FTC Act.  Further, the Biden administration has issued, and likely will continue to issue, executive orders and regulations to close any gaps in the final rule. Companies that violate the final rule may be subject to civil enforcement actions and penalties.