Client Alert: FTC Bans Non-Compete Clauses in Employment Contracts

On April 23, 2024, the Federal Trade Commission (“FTC”) voted to ban the imposition of non-compete agreements on employees. This ruling represents a major shift in the landscape of employment contracts and could have significant implications for both employers and employees.

Key Points:

• The FTC’s new rule prohibits employers from including non-compete clauses in employment contracts.
• Existing non-compete agreements are likely unenforceable.
• Employers are required to give notice and inform employees that non-compete clauses are void.
• A narrow exception exists for existing non-compete agreements with senior executives, but non-compete clauses in future agreements with executives will also be banned.
• This ban does not apply to non-solicitation, confidentiality, or non-disclosure provisions and agreements provided those provisions and agreements do not “function to prevent” an employee from working.

Impact on Employers:

Employers should review all existing employment contracts containing non-compete clauses, non-solicitation clauses, confidentiality provisions and non-disclosure obligations. Employers may need to update their standard employment agreements to remove non-compete language and update other provisions. Employers are required to give notice to employees that their non-compete agreements will not be enforced.

Legal Challenges Expected:

The U.S. Chamber of Commerce has already signaled its intent to challenge the FTC’s ruling in court. The legal battle could take time to resolve, but the FTC’s rule goes into effect 120 days after it is published in the Federal Register. This means the exact date is uncertain yet and has time to be changed. We will keep you updated on developments as they arise.

We Recommend:

• Employers consult with legal counsel to assess the impact of the FTC’s ruling on their specific situation.
• Employers consult with legal counsel to obtain language for the required notice to employees.

Please do not hesitate to contact our employment attorneys, Will Cherry or Jennifer Weaver, if you have any questions.