FTC Bans Noncompetes Nationwide in Most Instances

Anderson Kill Employment Law Insider Alert

PUBLISHED ON: May 2, 2024

The Federal Trade Commission (FTC) voted 3-2 on April 23rd in favor of a new rule banning covenants not to compete in most instances. 

The rule is scheduled to take effect 120 days from publication in the Federal Register, but the effective date is likely to be delayed, as the rule is expected to face multiple immediate legal challenges (including one from the U.S. Chamber of Commerce) arguing, among other things, that the rule is an overreach.

Covenants not to compete, widely known as “noncompetes,” are agreements between employees and employers in which the employee promises not to compete with the employer for a specific period of time and/or within a particular geographic area should the employment relationship terminate.

The new rule makes it illegal for an employer:

(i) to enter into or attempt to enter into a non-compete clause;
(ii) to enforce or attempt to enforce a non-compete clause (subject to the exceptions described below); or
(iii) to represent that the worker is subject to a non-compete clause.

For existing noncompetes, the rule adopts a different approach for senior executives (workers earning more than $151,164 who are in a “policy-making position”) than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date.

The rule includes a limited exception for noncompete clauses agreed to in connection with a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

The FTC contends the practice of allowing noncompetes suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. It estimates that its rule would impact about 30 million Americans and boost wages by nearly $300 billion per year.

In a press release, FTC Chair Lina M. Khan stated: ““Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC estimates that banning noncompetes will result in:

  • Reduced health care costs: $74-194 billion in reduced spending on physician services over the next decade.
  • New business formation: 2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year.
  • Rise in innovation: an average of 17,000-29,000 more patents each year.

The FTC rule does not ban non-solicitation agreements (of either customers or employees) or non-disclosure agreements.

As litigation challenging the FTC ban plays out, further state legislative initiatives are possible, and bipartisan federal legislation to limit noncompetes already introduced in Congress may also be taken up again.
In the last two years, states including Massachusetts, Colorado, Maryland and California have implemented or tightened bans on noncompete agreements, while New York almost did the same until Governor Kathy Hochul vetoed the bill.  Other states have full or partial bans of older vintage.

Noncompetes are already unenforceable in California, subject to a handful of limited exceptions related to the sale of a business, partnership or LLC or if the noncompete is necessary to protect an employer’s trade secrets.  Two recently passed bills beefed up the state’s law by: (1) providing for a private right of action; (2) requiring that employers notify all employees subject to a noncompete clause that it is void; and (3) prohibiting employers from enforcing in California noncompetes signed in another state. Minnesota and North Dakota have similar laws.

Noncompetes for employees earning less than a threshold amount are currently banned in some states and Washington, D.C. In Colorado, noncompete clauses are void for workers earning less than $101,250 annually. Illinois bans noncompetes at incomes up to $75,000/year. In Maryland, noncompetes are null and void for employees earning up to 150% of the minimum wage, currently set at $15.00/hour. Massachusetts law makes noncompete clauses unenforceable against employees paid on an hourly basis or below a given salary threshold, currently $35,568. In Virginia, employers cannot “enter into, enforce, or threaten to enforce a covenant not to compete” with any “low-wage employee.”  In Washington, D.C. noncompetes are prohibited if an employee earns less than $150,000 annually ($250,000 for medical specialists).

Given these recent developments nationwide, employers and employees should monitor the FTC rule and the law governing noncompetes closely, particularly if they conduct business in multiple states.