April 24, 2024
On April 23, 2024, the Federal Trade Commission voted 3-2 to approve a final rule banning noncompete agreements nationwide. The rule is slated to go into effect 120 days after it’s published in the Federal Register. The final rule will effectively ban the use of noncompete clauses by employers and require employers to rescind such existing agreements, with the exception of existing agreements with senior executives. Existing noncompetes with senior executives remain in force. The rule defines “senior executive” as an employee earning more than $151,164/year who is in a “policy-making position.” The rule includes an exception for noncompete agreements entered into as part of the sale of a business.
The FTC notes that its definition of “noncompete” applies not only to noncompetes, but also to terms that function as noncompetes – meaning any contractual provision that “has the effect of prohibiting the worker from seeking or accepting employment.” As examples of provisions that may function as noncompetes, the FTC identifies: (1) a nondisclosure provision that is “written so broadly that it effectively precludes the worker” from working in the same position for a new employer and (2) a provision that requires a worker to repay training costs where the repayment is not “reasonably related to the costs” of the training.
Legal challenges are very likely to be immediately filed against this rule, and it could be quite some time before this matter is resolved by the courts. As litigation plays out, employers are advised to revisit their restrictive covenants, and consider whether business interests can be protected in other ways, such as with properly tailored nonsolicitation or confidentiality clauses.
If you have any questions, please contact Dean Leazenby at (574) 294-7491 or [email protected].