FTC Bans Non-Compete Clauses

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Announcements, Business Law

FTC Bans Non-Compete Clauses 

by: Kyle McCutcheon

In a move poised to significantly impact American businesses, the Federal Trade Commission (“FTC”) published a final rule that prohibits employers from entering into or attempting to enforce non-compete clauses with their workers. Effective on September 4, 2024, the final rule is intended to capture oral or written agreements and applies to general non-compete workplace policies like those in an employee handbook as well.  

These contractual agreements have long been a contentious issue in the employee-employer relationship, and the FTC’s move marks a significant policy shift. While proponents argue that these agreements safeguard a company’s trade secrets and investment in employee recruitment and training, critics often highlight their adverse effects on workers’ ability to seek better opportunities and negotiate better wages.  

Not only has the FTC banned non-compete agreements, the final rule also requires employers to affirmatively provide written notice to workers who are parties to existing non-compete agreements—excluding senior executives as mentioned below—that the employer will not enforce such terms.  

The exceptions to the final rule are sparse. Existing non-compete agreements with senior executives executed prior to the effective date are exempt from the final rule. Other exceptions include non-compete agreements executed in connection with a bona fide sale of a business and causes of action under an existing non-compete arising before September 4, 2024.  

It goes without saying that the final rule will have an impact on the American workforce. With non-compete clauses no longer an option, employers may need to explore alternative strategies to protect their intellectual property, proprietary information, and business relationships. This could include strengthening trade secret policies and non-disclosure agreements, being more selective as to the information and access employees receive, and investing more resources in employee retention.  

Importantly, the final rule only applies to employers in industries with which the FTC has authority. The FTC does have authority over most businesses; however, non-profits, banks, insurance companies, transportation and communications common carriers and air carriers are exempt.  

Multiple lawsuits have been filed to challenge the FTC’s legal authority to issue such a broad rule and whether the FTC properly followed laws governing agency rulemaking by failing to consider a narrower approach. In defense, the FTC argues that non-compete agreements are an unfair method of competition for an employer against an employee, thereby justifying its actions as within its scope of authority.  

Only time will tell whether the final rule will be upheld but employers should be aware of the new near-total ban on non-compete provisions and begin assessing the impacts of the potential new landscape on their businesses.  

If you or a business owner you know need assistance to comply with the final rule or help to identify other strategies to protect your business in lieu of a non-compete, call or email us today to schedule a consultation with Mr. McCutcheon.  

Kyle McCutcheon is an Attorney at Provident Law. His practice areas include business, real estate, and estate planning as well as advising church and nonprofit tax-exempt organizations. McCutcheon is licensed to practice law in Arizona and Missouri, and he can be reached at kyle.mccutcheon@ProvidentLawyers.com or at 480-388-3343. 

 

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