On April 23, 2024, the Federal Trade Commission (“FTC”) voted to adopt a new rule banning noncompete agreements.  The rule prohibits employers from enforcing agreements to prevent employees from working for competitors or starting a competing business once their employment has ended.

FTC’s new rule applies to any agreement containing a noncompete clause, defined as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” See 16 CFR § 910.1.

FTC published a press release in support of the rule asserting that it protects the fundamental freedom of workers to change jobs, increases innovations, and fosters new business formation.  FTC estimates that the rule’s implementation will lead to new business formation growing by 2.7% each year, resulting in 8,500 additional new business created each year.

Under the new rule, most existing noncompete agreements will no longer be enforceable. The only exception provided by FTC for existing noncompete agreements is for senior executives, who represent less than 0.75% of workers.  However, FTC has banned employers from entering or attempting to enforce any new noncompete agreements regardless of whether they involve senior level executives. The rule will go into effect 120 days from the time it was published in the federal register, which is approximately August 21, 2024.

FTC has encouraged employers to turn their attention to non-disclosure agreements in lieu of noncompete agreements as a way to protect proprietary and sensitive information.  As far as incentivizing current employees to stay, FTC recommends that employers improve wages and working conditions in lieu of noncompete agreements.

Employers who have noncompete agreements with current employees are required to provide notice to those employees that the noncompete agreement will not be enforced against its employees.  FTC’s rule requires this notice to be delivered either by hand, by mail, or by email to all current employees.  See 16 CFR § 910.2(b)(2)(ii).  FTC has provided model language in its rule for employers to follow which can be found in Section 910(b)(4) of the rule.