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FTC Bans Employers From Using Non-Compete Clauses

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule to promote competition in the workforce by banning non-compete clauses across the United States for all workers except senior executives. For senior executives (defined as workers earning more than $151,000), existing non-competes will remain in force, while existing non-competes for all other workers will not be enforceable 120 days after publication of the rule in the Federal Register. Going forward, employers will also not be able to enter into new non-compete clauses with senior executives as well.

A non-compete clause is defined as a term or condition of employment that prohibits a worker from, penalizes a work for, or functions to prevent a worker, who is employed in the United States, from (1) seeking or accepting work prohibited by the non-compete or (2) operating a business after the conclusion of the employment that includes what the non-compete covers. The rule also preempts any State laws that conflict with the final rule.

The FTC estimates that 18% of U.S. workers are covered by non-competes which equates to over 30 million people (nearly one in five U.S workers). FTC Chair Lina M. Khan stated non-competes “keep wages low, suppress new ideas, and rob the American economy of dynamism, including from more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to the market.”

In January 2023, the FTC issued a proposed rule which was subject to the statutory 90-day public comment period. In the 90 days following, the FTC received over 26,000 comments with over 25,000 of the comments in support of the rule change. The comments are illustrative of the burden non-compete clauses have on workers. Stories include workers having to change fields for lower paying wages, not being able to start a small business after working 20 years for a company, small employers not being able to hire talent from bigger employers, and others. In general, small companies will largely reap the rewards of by leveling the playing field with bigger companies.  

Although non-compete clauses will be banned going forward for all U.S. workers, employers still have the alternative options to help protect their investments. For example, non-disclosure agreements remain in full effect and is still an established method for protecting proprietary and other sensitive information. The FTC believes that instead of using non-compete clauses, employers should attempt to work with employees to improve working conditions organically.

If you are a worker, employer, or any other person who has any questions about how this new rule change effects your employment or your business, the attorneys at Dalton & Tomich are here to assist you. Please reach out so we can begin helping you achieve your goals.

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