On April 23, 2024, the U.S. Federal Trade Commission (FTC) voted to finalize and promulgate a final rule that bans noncompete agreements for the vast majority of workers. While many expect that this rule will be enjoined prior to its September 4, 2024, effective date, it is unlikely that this will be the last attempt to ban employment-based noncompete agreements. Executive agencies will likely attempt bans of their own, as such agreements seem to have fallen out of favor under the Biden administration.
By way of background, President Biden signed an executive order on July 9, 2021, intended to promote competition in the American economy by, inter alia, calling on federal agencies to use their authority to curtail the use of noncompete agreements. Following that executive order, noncompete agreements have been in the crosshairs of Congress, the National Labor Relations Board (NLRB), several state legislatures, and the FTC. Below is a summary of those efforts, as well as an overview of legal challenges to the FTC final rule and alternatives to noncompete agreements.
In 2023, a group of bipartisan senators reintroduced the Workforce Mobility Act bill, which, if passed, would ban the use of noncompete agreements nationally except in connection with the sale or dissolution of a business relationship. Around the same time, another group of senators introduced the Freedom to Compete Act bill, which, if passed, would amend the Fair Labor Standards Act (FLSA) to ban the use of noncompete agreements for nonexempt employees. At this point, neither bill has passed, and they likely will not pass anytime soon.
In May 2023, the general counsel of the NLRB, Jennifer Abruzzo, published an enforcement memorandum stating that noncompetition agreements for nonmanagerial and nonsupervisory employees generally violate the National Labor Relations Act (NLRA). Abruzzo stated that these agreements “reasonably tend to chill employees in the exercise of Section 7 rights” as employees know that they will have “greater difficulty” finding new jobs if they are discharged for exercising their Section 7 rights.
Furthermore, in June 2024, an NLRB administrative law judge determined that noncompete employment agreements chill employees’ exercise of their Section 7 rights because, inter alia, such provisions could make employees “more fearful of being fired and less willing to rock the boat because they face the prospect of being unable to find any work in their geographic area if they are fired or forced to leave their job.” Similarly, the judge held that nonsolicitation clauses “would dissuade a reasonable employee from engaging in protected activity like telling their coworkers about wages and benefits offered by the Union out of a reasonable fear that [their employer] might accuse them of inducing other employees to quit.”
There are currently five states (California, Colorado, Minnesota, North Dakota, and Oklahoma) that have imposed complete bans on employment-based noncompete agreements. There is similar legislation pending in the New York State legislature; with the New York City Council; and in six other states (Connecticut, Illinois, Kentucky, Massachusetts, New Mexico, and Wisconsin).
Additionally, 12 states (Idaho, Illinois, Maine, Maryland, Massachusetts, Missouri, New Hampshire, Nevada, Oregon, Rhode Island, Virginia, and Washington) plus the District of Columbia have passed legislation to restrict postemployment noncompetition agreements to certain categories of workers.
In April 2024, the FTC announced its final rule, which, if not enjoined, would represent the most comprehensive and devastating blow to employment-based noncompete agreements. The rule provides that all future employment-based noncompete agreements would be prohibited after the rule’s effective date, September 4, 2024. The rule applies to all workers (e.g., employees, apprentices, independent contractors, volunteers, and interns) regardless of full- or part-time status.
Furthermore, that rule stated that only existing noncompete agreements with “senior executives” will be enforceable after the effective date. Senior executives are workers earning more than $151,164 annually (inclusive of salary, bonuses, and equity, but not benefits, board, or lodging) and in positions with policymaking authority for significant aspects of the business as a whole without a higher-level employee’s approval. For all other current and former workers, employers must issue notices that their noncompete agreements are unenforceable.
The final rule does not apply to noncompete agreements (1) in franchisee-franchisor relationships (however, the rule applies to employees working at the franchises); (2) with business outside of the FTC’s jurisdiction (e.g., certain nonprofit organizations); or (3) in connection with the sale of a business entity (although the rule applies to the employees working at the sold business).
After the FTC announced the final rule, the U.S. Chamber of Commerce and individual businesses moved to stay the effective date of the rule and to enjoin it. The challenges focus primarily on the bounds of the FTC’s authority and argue that the FTC exceeded that authority by promulgating the rule.
Given the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which ended the deference standard from Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., it is likely that the FTC’s rule will ultimately be enjoined. However, whether that happens before or after the September 4, 2024, effective date is to be determined.
Given the above landscape and likelihood that prohibitions on noncompete agreements will continue, employers should consider alternative protections. Employers can protect customer and employee relationships and confidential or trade secret information without noncompete agreements.
For example, garden leave agreements, nondisclosure agreements, nonsolicitation agreements, equity grant and forfeiture agreements, and training repayment agreements can achieve employer goals in employee retention and confidentiality while likely avoiding running afoul of any noncompete ban that may pop up.
To be sure, employers using these agreements should be careful to narrowly tailor those restrictions as any ban on noncompetes will likely implicate agreements designed to punish a worker for leaving or prohibit a worker from getting another job or effectively performing that job. For example, employers should limit the scope of nonsolicitation agreements to clients that the worker actually engaged with and performed work for during the course of the worker’s employment. Employers should also ensure that they follow any state-specific case law that restricts nonsolicitation agreements in addition to noncompetes. Furthermore, training repayment agreements should reflect the value of the training and should not include fee provisions that are unrelated to the business’s actual expenses incurred.
