U.S. Federal Trade Commission Bans Employee Noncompete Agreements; Here’s What Employers Should Know

U.S. Federal Trade Commission Bans Employee Noncompete Agreements; Here’s What Employers Should Know
April 30, 2024 6 mins

U.S. Federal Trade Commission Bans Employee Noncompete Agreements; Here’s What Employers Should Know

The FTC has announced a rule that bans noncompetes and clauses that have a similar effect. While the rule will face legal challenges, employers should take steps now to prepare for an environment where they cannot use noncompete agreements.

Key Takeaways
  1. Many companies rely on noncompete agreements to protect their business investments and to preserve trade secrets. However, critics say they have been misused to dissuade employees from leaving a job.
  2. The new rule does not ban existing agreements for senior executives, but it does prohibit employers from entering into or enforcing new noncompete agreements for all employees including executives. It also immediately bans all existing and new noncompete agreements for non-senior executives.
  3. To prepare for the ban, HR should evaluate their overarching people management philosophy, including alternative approaches to noncompete agreements, management of trade secrets and overall retention strategies.

The United States Federal Trade Commission (FTC) announced a rule banning noncompete agreements on April 23, 2024. This action followed the FTC’s January 2023 proposed rule and its review of over 26,000 public comments. On May 8, 2024, the final rule banning noncompetes was placed in the Federal Register. The rule has an effective date of 120 days after placement in the Federal Register, putting the official effective date of the rule at September 4, 2024.

Under this rule, noncompete clauses (or other similar clauses) that prevent workers from taking a new job or starting a new business will no longer be enforceable for the vast majority of workers. Existing noncompete agreements for senior executives can remain in force, but employers are otherwise prohibited from entering into or enforcing noncompete agreements even for senior executives. On July 3, 2024, the District Court for the Northern District of Texas granted a motion for preliminary injunction stating that the FTC exceeded its rulemaking authority in the FTC’s rule banning most non-compete agreements that was issued earlier this year. The injunction only applies to the plaintiff in the case and the trade associations that intervened. The District Court also said that they would issue a final ruling on the merits by August 30, 2024, just days before the FTC noncompete ban was originally scheduled to become effective. In the absence of any nationwide action with respect to the rule, it will go into effect on September 4, 2024, for all other employers.

Key Provisions of Ruling

The final rule prohibits any new noncompete agreements with all employees and independent contractors, including senior executives after the effective date. Additionally, the final rule prohibits the enforcement of existing noncompete agreements after the effective date unless the cause of action accrued prior to the effective date. However, it allows existing noncompete agreements for certain "senior executives" to stay in effect. The rule may ban more than just noncompete agreements. It could also cover non-solicitation agreements, no-hire agreements and specific repayment provisions for employees that have the same effect of a noncompete agreement.

Existing noncompete agreements can remain in force for senior executives that earn more than $151,164 in total annual compensation in the preceding year (or annualized if employed for only a partial year) and have authority over the company’s policy-making decisions, even if said executive is no longer employed by the company. It is important to note that the rule considers the executive's duties, rather than titles, to determine whether the executive operates at the highest levels of a business entity. This suggests that the exemption for current agreements is likely to apply to senior corporate officers of the company. All other existing noncompete agreements are banned after the effective date of the rule.

Employers are required to proactively give notice by the effective date to employees, both current and former, that their existing noncompete agreements are no longer enforceable. Violations of the rule will be deemed a violation of Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.”

Implications to Businesses

The FTC’s noncompete ban is likely to have significant implications for businesses across all industries. However, there are industries such as banking that are not subject to FTC oversight and will not be subject to the rule.

Many companies rely on noncompete agreements to protect their business investments and to preserve trade secrets. Noncompete agreements have widely been leveraged by companies to protect their business operations and safeguard their client base in attempts to maintain customer loyalty. One criticism of the rule is that the FTC's one-size-fits-all rule puts companies at increased risk by enabling employees to potentially not just take a position at a competing company, but also take intellectual property and insider information to direct competitors without any fear of legal repercussions.

Businesses may also need to adapt their talent management strategies once the rule goes into effect. The ban aims to foster innovation and entrepreneurship by allowing employees to freely change jobs or start their own businesses. Banning noncompete agreements would increase job mobility for most employees. While this is beneficial for employees, it poses a challenge for companies seeking to retain talent.

Considerations for Companies in Light of the New Rule

The rule is likely to take effect in late August or early September 2024. Companies should consider taking the following proactive measures to prepare:

  • Review Restrictive Covenants: Companies should revisit restrictive covenants, including non-solicitation and confidentiality provisions, to ensure provisions align with the new rule and are reasonably tailored to protect the company’s interests.
  • Define Exemptions: Given the fairly narrow language surrounding who is considered a “senior executive” whereby existing non-competes (and other restrictive agreements) could be grandfathered in as an exemption, companies should ensure they identify those people and what their outstanding agreements entail.
  • Provide Notice: If the rule becomes effective, companies must be prepared to provide clear notice to employees that their noncompete clauses will not be enforced.

Once compliance with the rule is established, HR may want to consider evaluating their overarching people management philosophy in the following ways:

  • Evaluate Necessity: Assess whether existing noncompete agreements are necessary to protect the company’s legitimate interests. Consider alternative mechanisms, such as non-disclosure and non-solicitation agreements, to safeguard trade secrets and proprietary information.
  • Trade Secrets Management: Review internal processes and security measures to prevent unauthorized disclosure.
  • Talent Retention Strategies: Retaining talent without relying on noncompete agreements is crucial for fostering a positive work environment and ensuring employee satisfaction. Companies should revisit their retention strategies and ensure they are effective without the use of noncompetes.
How Aon Can Help:

Aon’s global Board and Executive Advisory Services has the expertise to help your company navigate the regulatory landscape and make timely, transformative and sustainable decisions. To learn more about how we help, please write to [email protected].

Aon's Thought Leaders
  • Amanda Benincasa
    Partner and Global Head of Corporate Governance, Talent Solutions
  • Amy Jennings
    Partner, Executive and Board Advisory
  • Dan Kapinos
    Partner, Executive and Board Advisory
  • Sahar Hassan
    Senior Consultant, Executive and Board Advisory
  • Kate Evert
    Partner, Talent Solutions

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