FTC Announces Rule Banning Post-Employment Noncompete Agreements

The Federal Trade Commission (“FTC”) just published a final rule that effectively bans noncompete agreements in the workplace.  Simply put, a “noncompete” typically refers to a clause or set of clauses in an employment contract that prohibits an employee from competing with his or her employer—whether as an employee, independent contractor, owner, partner, or consultant—usually within a certain geographic area and for a defined period of time (typically from 1-5 years).  The ban only applies to post-employment noncompete agreements.  It does NOT apply to in-term noncompetes that prohibit an employee from competing against his or her employer while still employed.

More specifically, the final rule prohibits new noncompete agreements with ALL workers, including senior executives, after the effective date. Specifically, the final rule declares that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.

For existing noncompete agreements, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule. Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”  It is estimated that fewer than 1% of workers are estimated to be senior executives under the final rule.

To be clear, there are two contexts in which noncompetes remain protected:  (i) in connection with the sale of a business, and (ii) in connection with a franchisor-franchisee relationship.

Click here to view the full text of the final Rule which will go into effect in 120 days.

Probably safe to say the publication of this rule will trigger a wave of litigation and legislative activity in the coming months, so stay tuned for updates.