What Business Owners Need to Know About the FTC’s New Rule on Non-competes

An estimated 30 million Americans currently under a non-compete agreement may soon be free to leave their job and immediately go to work for a competing business because the Federal Trade Commission (FTC) recently issued rule that prohibits them for nearly all employees. Here’s what we know now:

What does the new rule say?

Non-compete agreements are now prohibited for employees earning less than $151,164 annually, the Department of Labor’s 2025 threshold for highly compensated employees. For those earning more, non-competes will only be valid for current senior executives with policy-making authority, but new agreements can’t be formed or enforced.

Are there any exceptions?

A business owner who is selling a business will still be expected to comply with a non-compete. However, this only applies to the business owner, not any of the company’s employees, which can impact buy-sell agreements and even the value of a business.

Why did the FTC make this ruling?

FTC Chair Lina M. Khan emphasizes that non-competes stems wages, curbs innovation, and slows the creation of new businesses. The FTC expects the new rule to raise average worker earnings by $524 a year and decrease healthcare costs by up to $194 billion in the next 10 years. Additionally, it expects the rule to increase innovation, resulting in 17,000 to 29,000 more annual patents over the next decade.

How will this impact most businesses?

Business owners will not be able to ask employees to enter into non-compete agreements going forward, nor will you be able to enforce existing agreements unless they are with senior executives as described above. You will also be required to notify past and present employees that their non-competes are now unenforceable once the law goes into effect in 120 days, currently estimated to be around August 21, 2024. This notification must be in a digital format (email or text) or on paper (letter). Sharing this information orally does not count. While non-competes are virtually going away, non-solicitation, non-recruitment, and non-disclosure agreements are still permissible, as long as they aren’t non-competes masquerading under another name.

Is this legal?

Lawsuits have been filed at both the state and federal level objecting to the FTC’s authority to issue this ban, which could cause it to change or be delayed. The U.S. Chamber of Commerce has promised to file legal action, along with other business advocacy groups and hundreds of individual business owners. While there is no guarantee, no one should be surprised if a federal court judge extends the deadline or strikes it down entirely.

What do business owners need to do now?

There is no need to start notifying employees until closer to the deadline, particularly considering all the legal activity that is expected around this rule. However, you should take inventory of your existing non-compete agreements and make sure you have contact information for those that are with former employees. You may also want to take a look at any non-solicitation, non-recruitment, non-servicing, and non-disclosure clauses since they too may come under more scrutiny soon. And if you have trade secrets you want to protect, take a look at the policies and procedures you have in place to limit who sees them.

We’ll continue monitoring developments and provide updates as new information becomes available. You can read more about the FTC’s decision here.

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