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ALERT: New Federal Rule Banning Non-compete Agreements Across Industries: Pros and Cons & What’s Next?

By Robin Gerofsky Kaptzan, Esq. & Sandy Srebnick

FTC Announces Rule Banning Non-Compete Agreements

The Federal Trade Commission (FTC) has announced a new rule banning non-compete agreements for employees across various industries. This significant policy change aims to enhance labor market mobility and worker freedom, but it comes with limitations and concerns that businesses and employees should know about.

Key Details:

  • Effective Date: September 4, 2024
  • Scope: The rule prohibits employers from entering new or enforcing or threatening to enforce most existing non-compete clauses and agreements with employees and independent contractors; only a small class of non-competes remain enforceable.

Why Did The FTC Enact The New Rule? Non-compete agreements have long been used by employers to prevent employees from working for competitors, starting their own business, or engaging in competitive business activities within a certain time-period in a certain geographic region using certain skills after ending the relationship. The FTC’s position is that these agreements stifle competition and suppress wages by limiting workers’ ability to pursue better job opportunities. It is estimated that the absence of non-competition requirements in relationships will increase the opening of businesses, staff earnings, and drive innovation.

What Are The Concerns? The Society for Human Resource Management (SHRM) and other business advocacy groups have expressed strong opposition to the FTC’s rule. They assert that non-compete agreements protect trade secrets and investments in employee training. SHRM has raised concerns that the blanket ban may negatively impact businesses’ ability to safeguard their proprietary information and maintain competitive advantages.

Which Employees Are Affected? Starting from the effective date, all employees and independent contractors no longer are obligated to comply with a non-compete obligation in a contract and a new contract cannot be entered into, with a small group carved out as an exception. Highly compensated employees, usually the senior executives, earning more than $151,164 annually and who engage in policy making decisions, have their non-competes remain enforceable so long as the terms are reasonable and necessary to protect legitimate business interests.

What Are Employers’ Next Steps? Employers need to review existing contracts and determine which non-competes become unenforceable on the effective date. For agreements with unenforceable non-competes, employers have the choice of revising an agreement to redact the non-compete clause or send a clear notice of the changed obligations to the employee. These contracts can be revised to include a more targeted non-disclosure agreement, using language from the trade secret laws as protection. To ensure clarity, it is also recommended to inform employees in writing in the senior executive class that the non-compete is enforceable.

Zahn Law Global, LLP will continue to monitor this situation and provide updates and support. For more details, please contact us at info@zahnlawglobal.com or visit the FTC’s official announcement FTC Press Release.

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Attorney Advertising. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.