FTC bans noncompete clauses for most workers

The FTC finalized a rule (89 FR 38342) that would ban the use of most noncompete clauses, effective Sept. 4, on a 3-2 vote.

The final rule is controversial. The U.S. Chamber of Commerce, Business Roundtable, and other state-level business advocacy groups have sued to stop it, arguing that new law, rather than regulation, is required to ban the practice.

If it withstands a legal challenge, the final rule would make most noncompete clauses unenforceable 120 days after publication; that effective date would currently be Sept. 4, 2024. The rule would affect clauses entered into before that date, with a notable exception for existing non-competes with senior executives. Under the final rule, a senior executive is defined as a worker in a policy-making position who also received total annual compensation of at least $151,164 in the preceding year.

The final rule also requires employers to notify workers, other than excepted senior executives, with existing non-competes that the agreements are no longer enforceable on or after Sept. 4, 2024. To facilitate compliance and minimize burdens, the final rule includes model language that would satisfy this new notice requirement.

The final rule defines noncompete clauses broadly to include a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i) 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

(ii) Operating a business in the United States after the conclusion of the employment that includes the term or condition.

The final rule also clarifies that a term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

The final rule also defines the term “worker” broadly to mean a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal law, including but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. 

In addition, there is a narrow exception for certain “bona fide sales of business” — the final rule generally does not apply to a noncompete clause entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

Not all industries or employers are affected by the rule, as some, like banking and some nonprofits, do not fall under the FTC’s jurisdiction, though the extent to which the rule applies to nonprofits, appears uncertain. 

The FTC applies a two-part test to determine whether a corporation is organized for profit and thus within the FTC’s jurisdiction — the not-for-profit jurisdictional exception requires both (i) that there be an adequate nexus between an organization’s activities and its alleged public purposes and (ii) that its net proceeds be properly devoted to recognized public, rather than private, interests. The FTC noted that judicial decisions and FTC precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the FTC’s jurisdiction.