The U.S. Federal Trade Commission (FTC) has approved a proposed final rule banning most new noncompete clauses in employment contracts. This sweeping rule affects millions of workers and makes all existing noncompete agreements (except those covering senior executives) unenforceable. The rule defines “noncompete clause” as a contractual term that blocks a worker from working for a competing employer or starting a competing business within a certain geographic area and period of time after the worker’s employment ends.

While the rule reflects some changes from the original proposal, it remains significant. The FTC estimates that only about 0.75% of all workers fall under the definition of “senior executive.” The rule aims to protect workers’ mobility and prevent noncompete agreements from suppressing wages and harming competition.

Employers should be aware of this significant change and adjust their practices accordingly.

Here are some key implications of this rule for employers:

1. Ban on New Noncompete Clauses:

   • Employers are prohibited from creating new noncompete clauses in employment contracts.

   • These clauses would have restricted workers from seeking employment with competitors or starting competing businesses after leaving their current job.

   • The ban applies to most workers, except for those qualifying as “senior executives.”

2. Existing Noncompete Clauses:

   • Existing noncompete agreements (except for senior executives) are rendered unenforceable.

   • Employers must notify employees subject to prohibited noncompetes that these clauses will not be enforced.

3. Exceptions:

   • There are narrow exceptions for noncompete clauses related to the “sale of business” and existing causes of action accrued before the rule’s issuance.

   • However, the rule is subject to legal challenges, and its implementation may be impacted or delayed.

4. Legal Challenges:

   • Critics argue that the rule exceeds the FTC’s authority, violates the Administrative Procedure Act, and ignores potential pro-competitive benefits of noncompetes.

   • Employers should prepare to comply with the new rule within a few months, although its enforcement remains anything but certain.

Need help reviewing your employment agreements or have noncompete agreements currently in place that you need help deciding what options you have after this new rule takes effect? Maybe its time we had a chat, let’s talk!