The Federal Trade Commission (FTC) has recently issued a new final rule prohibiting all employers from enforcing non-compete agreements against their employees. A non-compete agreement essentially bans a worker from moving to another employer within the same industry for a set period of time, citing the employer’s privacy and competition concerns. Workers have long protested the agreements, citing that they keep them beholden to a particular employer and limit their employment mobility, including in the agricultural sector. The Illinois Attorney General has welcomed news of the new rule, citing unfair workplace practices that create racial and gender inequities and market confusion across states, where enforcement of such agreements historically varied.
The rule includes a prohibition on entering into new non-compete agreements with workers, as well as a requirement to cease enforcement of any existing agreements with workers that include a non-compete clause. The FTC has stated that the rule aims to ban non-compete agreements because they constitute “an unfair method of competition” for the majority of workers. By eliminating non-competes, the labor market will be able to boost competition, spur new businesses (including new patents), increase wages and provide further antitrust protection. The FTC also cited concern that non-competes affect overall labor competition and innovation. Lastly, the agency has said that employers have other means to address their privacy and trade secret concerns, including non-disclosure and confidentiality provisions in employment and separation agreements.
Approximately 20% of all workers are currently bound by non-compete agreements, or nearly 30 million U.S. workers, including those in non-decision-making roles. The current rule affects nearly all workers with the exception of senior executives who are both involved in policy-making decisions and earn at least $151,164. The rule will go into effect 120 days from its publication date in the Federal Register, which was May 7, 2024. This means that all companies have until September 4, 2024, to comply.
As part of the new rule’s requirements, companies must inform all workers who have signed a non-compete agreement that the agreement is no longer in effect. As a result, most companies will need to conduct an internal survey to assess which employees are currently bound by a non-compete (as a result of signing a Work for Hire agreement or any other employment agreement that includes a non-compete provision) and notify them in writing that the provision in their work contract is no longer effective and they are no longer bound by it. The FTC has provided sample notice language employers can use on its website.
Overall, the elimination of non-competes has been welcomed largely by workers and public agencies, though the business sector is expected to bring legal challenges against it. For now, employers are best advised to comply with the rule until a court weighs in to determine its legality.