The Federal Trade Commission (FTC) has announced a final rule prohibiting noncompete agreements for employees, independent contractors, and executives. The ban will take effect in early September, 120 days after its publication in the Federal Register on May 7. However, legal challenges have been raised against the ban, with many experts predicting that it may not survive.
The final rule defines a noncompete as any term or condition of employment that restricts a worker from taking another job or starting a business after leaving their current employment. While the ban primarily targets standalone noncompete agreements, it may also impact executive agreements, equity grants, employment contracts, and severance agreements. The ban may extend beyond basic noncompete clauses to include provisions affecting stock options and restricted stock units.
Although the ban is broad in scope, there are exceptions. Existing noncompetes for senior executives earning more than $151,164 per year can remain in force, provided they hold a policy-making position. The ban also excludes certain industries, such as nonprofit organizations and businesses regulated by specific acts. Noncompetes related to mergers and acquisitions are also permitted under the final rule.
The federal noncompete ban supersedes any state laws related to noncompetes that are weaker or conflicting with the federal rule. States with stricter noncompete regulations, like California, will continue to enforce their laws. In addition to noncompetes, the ban may also impact similar agreements like nondisclosure agreements, training repayment agreements, and nonsolicitation agreements if they hinder workers from seeking new opportunities.
If a former employer is pursuing legal action to enforce a noncompete pre-dating the ban, the litigation can proceed. However, the federal rule requires companies to inform employees that their noncompete agreements are no longer enforceable. Legal challenges to the ban have already been initiated by various plaintiffs, including the United States Chamber of Commerce and Ryan LLC, a provider of tax services and software, citing concerns about the FTC’s authority and the constitutionality of the rule.
It is anticipated that some legal challenges against the noncompete ban may succeed, given the potential constitutional implications of the rule. However, any successful challenges may face a lengthy appeals process before a final decision is reached. Companies and individuals affected by the ban should stay informed of ongoing legal proceedings and be prepared for potential changes to noncompete agreements in the future.
