You likely saw the headlines in April of this year: “FTC Bans Non-Compete Agreements.” The Federal Trade Commission (FTC) released its Final Rule, effectively banning most post-employment non-compete agreements (also commonly referred to as non-compete clauses). What does that mean? Basically, the company you’re leaving can no longer limit what companies you can work with next.
The Final Rule takes effect on September 4, 2024, and would end all existing non-competition obligations for workers (other than a few exceptions for those defined as “senior executives”). After that September deadline, all noncompete agreements—including those for senior executives, would be banned.
While this seems like a win for workers at every level, with FTC estimates of an extra $524 in yearly income per person, and for companies, with the FTC projecting more innovation and an estimated 8,500 more startups as a result of the ruling, there are some companies fighting the ruling.
Three major lawsuits were filed in federal courts in Pennsylvania and Texas, arguing that the FTC lacks the constitutional and statutory authority to impose such a sweeping ban of post-employment non-compete agreements. Rulings on requested injunctions to prevent the final rule from taking effect are expected to arrive in July.
What is a non-compete agreement?
A non-compete agreement legally prohibits an employee from competing with an employer after the employment period ends. This can involve joining a competitor company or starting a competing business. Typically included as a clause in their contract, it varies in terms of the types or number of competitors, how long the employee is restricted from working for a competitor, the geographic area covered, and what qualifies as competitive activity.
Do I still have to comply with my non-compete agreement?
In short: maybe. If the final rule survives the pending legal challenges, companies will be required to provide notice to all workers, except those defined as “senior executives,” that their post-employment non-competition obligations are rescinded. A vast majority of employees will be free to move to a competitor—any competitor.
How do I know if I’m a “senior executive?”
You’re probably not: The FTC estimates that fewer than 1% of workers qualify as “senior executives” under the ruling. That said, senior executives who currently have a non-compete agreement are still bound by it. So here’s how to check if you are one:
If you are in a “policy-making position” and you made at least $151,164 in total compensation in the preceding year (or annualized if the worker was employed for a partial year), then the FTC considers you a “senior executive.”
The FTC defines a “policy-making position” like this: “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”
In other words, if you manage a team but someone higher up the chain makes the big decisions, you’re likely not considered a “senior executive” under this ruling. Still not sure? Read this description of “policy-making authority” and see if it applies to your role and responsibilities: “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or an affiliate of a common enterprise.”
The gist: Unless you are an “officer” or another employee with “final authority,” your existing non-compete agreement will likely be voided.
What about any new non-compete agreement after the effective date?
If the final rule survives legal challenges, beginning September 4, 2024, new post-employment non-competition agreements will be prohibited, even for senior executives, if they are based on promises to provide at-will employment, access to confidential information, customer relationships, goodwill, training, or long-term incentives, equity, and severance.
That said, you can still legally be incentivized not to work for a competitor. The ruling would not prohibit restrictions in the form of (1) non-competes in the sale of a business entity; (2) forms of garden leave (when you’re paid not to work) that keep employees on payroll with all benefits; (3) the use of equity-based covenants triggered only by the redemption (repurchase) of workers’ vested equity interests upon separation of service; or (4) fixed-duration or term-of-service contracts. The common thread here: If your current employer is paying you for your time, they can still prohibit you from competing.
Likewise, if you’re contracted to work with a company for a fixed duration, it’s not illegal for that company to include a non-compete clause in your contract for the time that you’re actively working for them. The legalese: “fixed-duration employment contracts, i.e., contracts between employers and workers whereby a worker agrees to remain employed with an employer for a fixed term and the employer agrees to employ the worker for that period, are not non-compete clauses under the final rule because they do not restrain post-employment conduct.” Once your contract is up, however, you can once again work for and with whatever company you want.
Cody Wilcoxson, Anthony Haller, Mike Schaedle, and Pete Tsoflias contributed to this article.