What You Should Know About the Non-Compete Ban
What You Should Know About the Non-Compete Ban
The U.S. Federal Trade Commission (FTC) recently outlawed non-compete provisions in U.S. employment contracts. This latest judgment has triggered a wave of new legal actions against the ruling. The FTC voted 3-2 along party lines in a Special Open Commission Meeting on April 23, 2024, to promulgate a final rule banning non-compete clauses in employment and worker contracts, with narrow exceptions for the sale of a business and senior executive agreements. Immediately after the rule was issued two cases were filed its challenging constitutionality.
What is FTC's Non-Compete Agreement Ban?
This new regulation deems it unfair competition for employers to engage in or attempt to enforce non-compete clauses. Broadly defined, these clauses prevent workers from seeking new employment with a competitor or starting a competitive business post-employment. While non-disclosure and non-solicitation clauses remain permissible, overly restrictive terms may be invalidated. The FTC highlighted that clauses with a "functions to prevent" aspect could be scrutinized if their impact mirrors traditional non-compete clauses.
Who is Covered Under the New Regulation?
The Rule extends to all "workers", encompassing employees, independent contractors, volunteers, interns, and externs. While the Rule doesn't exempt specific employers, certain entities, like some nonprofit organizations, fall outside the FTC's jurisdiction.
Existing non-compete clauses can only be enforced against "senior" executives which are entered into prior to the ban's effective date.
FTC on the Non-Compete Ban
The ruling is largely based upon the notion that non-compete agreements impose significant hardships on workers, which can hinder career advancement and wage growth by tethering individuals to their current employers. According to the FTC, the final rule outlawing non-competes will increase fresh business creation by 2.7% every year, creating almost 8,500 new business annually. The government also anticipates the regulation will raise worker earnings by $524 per year and cut health care expenses by $194 billion over the next decade.
The lawsuits challenging the ruling make several arguments, but are based largely on the notion that the FTC does not have the authority to issue such a ban. In short, they assert that unless Congress gives the FTC the authority, including specific guidelines on implementation, the rule is unlawful.
Conclusion
Only time will tell whether the ban is upheld or not, but, at the very least, it's likely to have a major impact on employment relationships and contracts in the short term. If you have questions about the ruling and how it might affect your company, please contact Brim Law.