FTC Final Non-Compete Clause Rule Takes Effect on September 4, 2024
By: Emily Thompson, Esq. and James Jeffrey Burns, Esq.
On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Non-Compete Clause Rule (Final Rule), prohibiting employers from entering into or attempting to enter into non-compete agreements with workers, including employees and independent contractors, or from representing that a worker is subject to such an agreement. This Final Rule, which will take effect on September 4, 2024, preempts any state laws that permit or authorize conduct banned under the Final Rule or that conflict with its notice requirements.
The Final Rule mandates that employers provide clear and conspicuous individualized notice to workers who are subject to prohibited non-compete agreements, informing them that such agreements will not and cannot be legally enforced, no later than the effective date of September 4, 2024.
However, the Final Rule does not bar the enforcement of non-compete agreements where the cause of action related to the agreement accrued before September 4, 2024. Employers may also maintain existing non-compete agreements with senior executives—defined as those earning over $151,164 annually and holding policy-making positions within the business. Nevertheless, employers will be prohibited from entering into or attempting to enter into new non-compete agreements with senior executives after September 4, 2024. Furthermore, the Final Rule stipulates that it is not an unfair method of competition to enforce or attempt to enforce a non-compete agreement, or to make representations regarding a non-compete, provided there is a good-faith belief that the rule does not apply.
The Final Rule is presently facing legal challenges from businesses and industry groups that argue that it oversteps the FTC’s authority or violates contractual freedom. On July 23, 2024, a District Judge in the Eastern District of Pennsylvania delivered an opinion in the ATS Tree Services case, denying an employer’s motion for a temporary injunction against the rule. The court determined that the employer had not demonstrated irreparable harm or a substantial likelihood of success on its claim that the FTC lacked the authority under the FTC Act to issue the Final Rule, or that Congress’s delegation of such authority was unconstitutional. Conversely, earlier this month, a District Judge in the Northern District of Texas issued an opposing opinion in the Ryan LLC case. This judge granted a narrow injunction that delayed the rule’s effective date for the plaintiffs, rather than the nationwide injunction the plaintiffs had requested, on the grounds that the plaintiffs were likely to succeed in their claim that the FTC lacked the authority to issue the noncompete rule and that the employer had shown irreparable harm.
While the Final Rule aims to enhance worker mobility and competition in the labor market, it could also have a significant impact on both employees and employers, reshaping the landscape of employment contracts and labor relations across the United States.
