New FTC Rule Bans Noncompete Agreements in Employment Contracts

Federal Trade Commission (FTC) Issues New Rule Banning Certain Noncompete Agreements

In a significant development, the Federal Trade Commission (FTC) has issued a new rule banning noncompete agreements in employment contracts. The rule, which comes into effect on July 1, 2024, marks a major shift in employment law and is aimed at promoting competition, enhancing labor mobility, and empowering workers. Noncompete agreements, commonly included in employment contracts, restrict employees from working for competing companies or starting their own competing businesses for a certain period of time after leaving their current employer. While proponents argue that such agreements protect a company's trade secrets and prevent unfair competition, critics argue that they stifle worker mobility, suppress wages, and hinder innovation.  See the FTC Announcements Rule Banning Noncompete.

Details of the New Rule FTC Rule Banning Noncompete Agreements

Under the new FTC rule, noncompete agreements in employment contracts are deemed to be anticompetitive and therefore illegal. The rule applies to all employers operating in the United States, regardless of their size or industry. Employers are prohibited from requiring employees to sign noncompete agreements as a condition of employment, and existing noncompete agreements are void and unenforceable. This new rule does apply to already existing noncompete agreements subject to the exceptions below.

Exceptions

While the new rule generally prohibits noncompete agreements, there are certain exceptions:

1. Sale of Business: Noncompete agreements entered into in connection with the sale of a business are exempt from the rule, provided that the buyer and seller are not competitors at the time of the sale.
2. Trade Secret Protection: Employers are still permitted to require employees to sign confidentiality agreements to protect trade secrets and other confidential information.
3. Senior Executives: Employers may still enforce existing noncompete agreements against senior executives. A senior executive is defined as workers earning more than $151,164 who are in a “policy-making position.” However, noncompete agreements entered into after the rule goes into effect, are not enforceable against senior executives.
4. Franchisee/Franchisor Contracts: The new rule does not apply to franchisee/franchisor contracts though it does apply to employees working for a franchisee or franchisor.

How Does the FTC Ruling Affect Individual States

This new FTC rule applies nationwide and preempts any conflicting state laws. This means that the rule supersedes any existing state laws regarding noncompete agreements in employment contracts. While some states have already enacted their own laws restricting the use of noncompete agreements, the new FTC rule establishes a uniform standard across the country. Employers operating in the United States are required to comply with the new rule, regardless of the state in which they are located. However, it's important to note that the new FTC rule does not prevent states from enacting stricter regulations regarding noncompete agreements. States may still pass laws that provide additional protections for workers beyond what is required by the FTC rule.

Who Will Enforce the New FTC Rule on Non Competes

The FTC will be responsible for enforcing the new rule. Employers found to be in violation of the rule may be subject to civil penalties, including fines and injunctive relief. Additionally, employees who believe that their employer has violated the rule may file a complaint with the FTC. This new rule is expected to have a significant impact on the labor market. By increasing labor mobility and empowering workers to seek better job opportunities, the rule is expected to lead to higher wages, increased innovation, and greater economic growth. It is also expected to promote competition among businesses, leading to better products and services for consumers.  This new rule represents a major victory for workers and a significant step towards promoting competition in the labor market. By eliminating barriers to job mobility and empowering workers to seek better opportunities, the rule is expected to benefit both employees and employers alike.

Employment Agreement Attorneys with Knowledge of New FTC Non-Compete Agreement Rules

Employers should review their employment contracts to ensure compliance with the new rule, and employees who believe that their employer is in violation of the rule should file a complaint with the FTC. For expertise on employment law and navigating the new FTC non-compete rules, you can consider reaching out to the attorneys at Wilson Whitaker Rynell. The firm has a strong reputation for handling non-compete litigation and other business disputes effectively. Key attorneys you might want to consult include Jennifer Rynell and John Wilson.