On April 23, 2024, in a 3-2 vote, the U.S. Federal Trade Commission (FTC), issued a landmark new rule prohibiting most noncompete clauses in employment contracts in an attempt to improve labor mobility and competition. The rule was proposed in January 2024 and subject to a 90-day public comment period, which drew more than 26,000 comments, over 25,000 comments in support of the ban. According to the FTC, this rule has many benefits, including that it will generate 8,500 new businesses yearly, increase worker wages, decrease health care costs, and boost innovation. Learn more about the rule on noncompete clauses and how it will impact employers.
Which Employee Contracts are Affected?
Not all noncompete clauses were banned by the FTC’s new rule. Effective 120 days post-publication in the Federal Register, this rule exempts only senior executives earning above $151,164 (annually) and in policy-making roles. Further, while existing noncompetes for senior executives can remain in place, employers are prohibited from entering into or enforcing new ones. 
Additionally, the rule declares existing noncompete agreements for other employees unenforceable and mandates that employers notify current and past employees affected by this change.
Business Implications and Employer Strategies
This regulatory change significantly changes how businesses manage their workforce and protect their business investments, client relationships, confidential information and competitive edge. While it aims to increase labor market fluidity, it also challenges businesses to find new ways to secure their trade secrets and competitive advantages, without relying on noncompete agreements.
In response to this new rule, businesses should promptly review and plan to adjust their legal strategies and employment practices. Here are some measures employers may consider:
- Enhanced Nondisclosure Agreements (NDAs): Implement and strengthen NDAs to protect sensitive information without restricting future employment opportunities for employees.
- Non-solicitation Agreements: Implement or enhance non-solicitation agreements to prevent employees from poaching clients or colleagues or requiring payment if they do. These agreements may be a viable alternative to noncompete clauses.
- Training Reimbursement Agreements: Adopt agreements requiring employees to reimburse training costs if they leave within a certain period, although these should be designed carefully to avoid being seen as de facto noncompete clauses.
- Revised Employment Contracts: Review and revise employment contracts to ensure they comply with the new rule while protecting the company’s interests.
- Regular Legal Audits: Conduct regular audits of employment practices and agreements to ensure ongoing compliance with changing laws and regulations.
- Proactive Legal and HR Training: Keep legal and HR teams well-informed about the latest developments and compliance strategies related to employment law.
Support for Employers
To be sure, the FTC’s new rule is extraordinary, and likely to face immediate legal challenges. In the meantime, businesses should stay informed about the legal proceedings and be prepared to adapt their strategies accordingly.
Proactive engagement with FLB’s Employment Law attorneys, who can provide guidance on navigating these changes, will enable employers to remain compliant while protecting their vital interests.
