FTC Rule Bans Noncompete Agreements: What Employers and Employees Need to Know

By: Benjamin (Ben) Hamborg , Eric Friske | April 26, 2024

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that will significantly impact the use of noncompete agreements in the United States. The rule, which aims to promote competition and protect workers’ rights, will take effect 120 days after its publication in the Federal Register, which has not yet occurred. As an employer or employee, it is crucial to understand how these changes may affect you and your organization.

KEY TAKEAWAYS: THE IMPACT OF THE FTC’S RULE BANNING NONCOMPETE AGREEMENTS

1. New noncompete agreements are banned: Employers are prohibited from entering into new noncompete agreements with all workers, including senior executives, after the rule’s effective date. Doing so will be considered an unfair method of competition and a violation of the FTC Act.
2. Existing noncompetes for senior executives can remain: For employees earning over $151,164 annually in policy-making roles, existing noncompete agreements may remain in force. However, for all other workers, existing noncompetes will no longer be enforceable after the effective date.
3. Notice requirement for existing noncompetes: Employers must provide notice to non-senior executive workers with existing noncompete agreements, informing them that these agreements will no longer be enforced against them.

HOW WILL THE FTC’S RULE BANNING NONCOMPETES AFFECT MINNESOTA EMPLOYERS?

This change will have a notable impact on Minnesota employers. In 2023, Minnesota enacted its own noncompete ban, but it only applied to noncompete agreements entered into after July 1, 2023. If the FTC rule takes effect, it will supersede Minnesota law and make any noncompete agreements entered into before that date unenforceable in Minnesota as well. The only exception would be for noncompete agreements that apply to senior executives and were entered into prior to July 1, 2023.

Employers should review their current noncompete agreements and practices to ensure compliance with the new FTC rule. Key steps include:

1. Review existing employment contracts and notify affected employees: Employers should conduct a thorough review of their existing employment contracts to identify any noncompete agreements that will be affected by the FTC’s final rule. This review should be undertaken as soon as possible to ensure compliance with the rule’s effective date and the notice requirements.

• a. Non-Senior Executive Workers: For non-senior executive workers with existing noncompete agreements, employers must provide clear and timely notice that these agreements will no longer be enforced. The FTC’s rule includes model language that employers can use to notify affected employees. Employers should ensure that all affected non-senior executive workers receive this notice and should maintain records demonstrating that the notice was provided.
• b. Senior Executive Workers: The rule defines senior executives as employees earning more than $151,164 annually who are in policy-making positions. Employers should verify that any senior executives with noncompete agreements meet this definition.

1. Refrain from entering into new noncompetes in employment agreements: Employers must not include noncompete clauses in any new employment contracts or agreements after the FTC rule’s effective date. This applies to all workers, regardless of their position, salary, or role within the organization. Employers should update their standard employment contract templates to remove any noncompete language and ensure that all future agreements comply with the new rule.
2. Implement alternative protective measures: With the ban on noncompete agreements for most workers, employers should explore alternative ways to protect their customers, trade secrets, confidential information, and intellectual property. This may include implementing robust nondisclosure agreements (NDAs), confidentiality agreements, customer nonsolicitation agreements, and other protective measures that do not unduly restrict an employee’s ability to work elsewhere.

WHEN DOES THE FTC RULE BANNING NONCOMPETES TAKE EFFECT?

The FTC rule banning noncompetes is scheduled to go into effect 120 days after its publication in the Federal Register. However, on April 24, 2024, the U.S. Chamber of Commerce and other business groups sued the FTC in Texas federal court seeking to block the new rule, arguing the FTC does not have authority to implement the rule and that the rule is too broad in scope. These and other potential legal challenges leave the future of the new FTC rule uncertain.

If you have any questions or concerns about how the FTC’s rule banning noncompete agreements may affect you or your organization, please contact Henson Efron for guidance and assistance in navigating these changes.

Benjamin (Ben) Hamborg

I begin with the end in mind when gathering evidence and investigating facts. Extracting the critical information, I craft it into a convincing story, whether it’s for a demand letter, a motion for summary judgment, or a trial. I advise and resolve complex legal and business disputes for both plaintiffs and defendants, on issues regarding: business torts construction defects breaches of contract intellectual property issues...

Eric Friske

I represent individuals and businesses in a wide range of complex business, estate, and trust litigation matters. At each stage along the way, I work closely with my clients to develop a successful strategy for their case, focusing on what is most important to them and their goals. In my litigation practice, I have a proven track record of advocating for my clients in the...