The FTC's Noncompete Rule: A Comprehensive Guide
What is a Noncompete Clause?
A noncompete clause is a provision in an employment contract that prohibits the employee from competing against their employer in a similar line of work within a specified geographic area and time frame.
The FTC's Final Rule on Noncompete Clauses
On January 5, 2023, the Federal Trade Commission (FTC) adopted a final rule banning noncompete clauses for most workers.
The rule goes into effect on September 4, 2024, and applies to all new noncompete clauses entered into on or after that date.
Existing noncompetes for senior executives — who represent less than 0.75% of workers — can remain in force under the FTC's final rule.
Key Provisions of the FTC's Noncompete Rule
- Bans new noncompete clauses with all workers, regardless of their position or industry.
- Rescinds existing noncompete clauses for most workers, with some exceptions for senior executives.
- Prohibits employers from retaliating against workers who refuse to sign or comply with a noncompete clause.
Legal Challenges to the FTC's Noncompete Rule
The FTC's noncompete ban has been met with legal challenges from several states and business groups.
Three ongoing legal challenges are:
- A lawsuit filed by the Texas Attorney General, joined by 19 other states, arguing that the rule is an overreach of federal authority.
- A lawsuit filed by the Chamber of Commerce, joined by several other business groups, arguing that the rule is harmful to businesses and innovation.
- A lawsuit filed by a group of individual plaintiffs, including former employees who have been subject to noncompete clauses.
The Future of Noncompete Clauses
The outcome of the legal challenges to the FTC's noncompete ban is uncertain.
However, the rule is a significant step towards eliminating the use of noncompete clauses, which have been widely criticized as unfair and anti-competitive.
If the rule is upheld, it will have a major impact on the way that employers and employees negotiate employment contracts.
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