In an open commission meeting on Tuesday, April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to ban nearly all non-compete agreements between employers and workers (broadly defined to include employees, independent contractors, and others, whether paid or unpaid). The effective date of the final rule could be on or about August 23, 2024, depending on the success of legal challenges, which have already commenced. 

The rule will ban new non-competes for all workers as of the effective date. The rule will also prohibit enforcement of existing non-competes with workers, except those with senior executives. “Senior executives” are workers in policy-making positions who earn annual compensation of at least $151,164; the FTC estimates that fewer than 1% of workers would qualify as senior executives under the final rule. While the final rule does not apply to the enforcement of existing non-competes against senior executives, it does prohibit employers from entering into new non-competes with senior executives after the effective date. 

As with the proposed rule, the final rule does not expressly prohibit other types of restrictive covenants, such as non-disclosure or non-solicitation agreements. However, the final rule does prohibit covenants or agreements that function as non-competes; regardless of their title, if a term or condition “is so broad or onerous that it has the same functional effect as” a prohibition or condition “prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule.” As a result of this broad definition, agreements that are not often thought of expressly as “noncompete agreements” could be deemed to be prohibited non-competes, depending on their impact.

The final rule does not apply to a non-compete clause entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership in a business entity, or of all or substantially all of a business entity’s operating assets.” This exception is not conditioned on the amount of the person’s ownership in such entity or assets, as was the case in the proposed rule.

By the effective date, employers will be required to provide clear and conspicuous notice to each current and former worker whose non-compete will become unenforceable explaining that their non-compete will not be enforced against them.  However, this requirement will not apply if a cause of action related to a non-compete has accrued prior to the effective date.

Many groups and businesses – and the two dissenting Federal Trade Commissioners – have argued that the rule exceeds the FTC’s statutory authority and that the rule is impermissibly retroactive in effectively extinguishing millions of contracts that were legal at the time in which they were entered into. The U.S. Chamber of Commerce and at least one company have already filed lawsuits seeking to block the final rule.

Dykema is closely monitoring the progress of the final rule and the anticipated legal challenges to the rule to provide guidance to clients with non-competes and other restrictive covenants that may fall under the final rule’s definition of non-competes or are considering these types of agreements or policies. 

For more information about the final rule, please contact Jim Hermon, Howard Iwrey, Cody Rockey, Elizabeth Voss, or your Dykema relationship attorney.

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Photo of Howard Iwrey Howard Iwrey

Howard B. Iwrey, a Dykema antitrust and trade regulation attorney with more than 25 years experience, represents companies from a broad range of industries including automotive, health care, technology, defense, commercial finance, sports, art publishing, utilities, retail, consumer appliances, electronics and investment services.

Howard B. Iwrey, a Dykema antitrust and trade regulation attorney with more than 25 years experience, represents companies from a broad range of industries including automotive, health care, technology, defense, commercial finance, sports, art publishing, utilities, retail, consumer appliances, electronics and investment services. Mr. Iwrey is the leader of the Firm’s Antitrust and Trade Regulation and Securities Litigation practices as well as a member of the Firm’s E-Discovery Group.

Photo of Cody Rockey Cody Rockey

Whether representing clients in antitrust matters or in complex commercial litigation, Cody understands that his clients need understandable, actionable guidance to make informed business decisions and chart a course forward. They require counsel who can analyze potential risks and roadblocks and then implement…

Whether representing clients in antitrust matters or in complex commercial litigation, Cody understands that his clients need understandable, actionable guidance to make informed business decisions and chart a course forward. They require counsel who can analyze potential risks and roadblocks and then implement strategies to mitigate the former and overcome the latter.

Photo of James Hermon James Hermon

Jim Hermon is the Leader of Dykema’s Labor and Employment Practice Group. He provides full-circle employment counsel, helping clients manage employer-employee relationships at all levels and meet their state and federal regulatory and statutory obligations. Jim advises on all aspects of the workplace…

Jim Hermon is the Leader of Dykema’s Labor and Employment Practice Group. He provides full-circle employment counsel, helping clients manage employer-employee relationships at all levels and meet their state and federal regulatory and statutory obligations. Jim advises on all aspects of the workplace, from onboarding and handbooks to internal investigations and litigation, to exits and severance agreements, always with an eye on the client’s business objectives.

Photo of Elizabeth Voss Elizabeth Voss

Elizabeth provides clients with labor and employment counsel, handling employment-related regulatory compliance matters, and litigating claims arising from the employer-employee relationship. Her clients span several industries and range in size from small closely-held entities to mid-market corporations