FTC Issues Final Rule Banning Non-Competition Clauses in Employment Agreements; Legal Challenges Filed

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that prohibits employers from entering into new non-compete agreements with their workers and prohibits employers from enforcing existing non-compete agreements with all but the most senior executives (as defined in the rule).  FTC jurisdiction, and thus the new rule, covers for-profit corporations.  

Under the new rule, employers must notify in writing all workers other than “senior executives” by the rule’s effective date that their existing non-competes will no longer be enforced.  The effective date could be late August or early September depending on the rule’s publication date in the Federal Register and barring a court stay or other change.  

Legal challenges may impact the effective date or enforceability of the rule.  The U.S. Chamber of Commerce, the Texas-based tax firm Ryan, and other business groups have already filed lawsuits, arguing that the FTC does not have the authority to issue the rule.  Although it remains to be seen whether the rule will survive the legal challenges, employers should consider strengthening permissible restrictive covenants with their workers and otherwise develop a plan to comply with the new rule should it become effective.

Key Takeaways:

• Under the final rule, existing non-compete agreements for the vast majority of U.S. workers will no longer be enforceable after the rule’s effective date.  
• The final rule applies to all workers who provide a service to a person or company, whether paid or unpaid, and includes employees, independent contractors, interns, volunteers, apprentices, externs and sole proprietors.  
• Existing non-compete agreements for senior executives, defined as workers who earn more than $151,164 annually and who are in policy-making positions, may remain in force, but employers may not enter into new non-compete agreements with such individuals after the effective date.  
• Employers should work with employment counsel to determine the impact of the rule on their agreements, policies and workforce, and how best to prepare should it become effective.
• Employers should develop alternative strategies to protect their business interests, including the use of NDA’s and, if lawful, strengthening their non-solicitation agreements with employee.

Read the complete client alert.

*  *  *

Kasowitz Benson Torres’ Employment Practices and Litigation Group is comprised of trial-seasoned former prosecutors and other talented litigators who leverage their employment litigation know-how and experience to achieve extraordinary results early in cases, or by taking the case through discovery to trial and verdict.  Our lawyers have significant experience in all areas of employment litigation, including enforcement and defense of non-competition agreements, confidentiality agreements, and breaches of fiduciary duty.

For more information, please contact:

Mark W. Lerner
Partner
mlerner@kasowitz.com 

Jessica T. Rosenberg
Partner
jrosenberg@kasowitz.com 

Melissa A. Barahona
Partner
mbarahona@kasowitz.com 

Yeilee Woo
Associate
ywoo@kasowitz.com