Non Compete Rule

The Federal Trade Commission (FTC) announces a rule banning non-competes. Notify your employees and contractors with our form template to comply with federal rules.

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Last Update June 12th, 2024

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What Is the FTC Rule on Non-Compete Agreements

The FTC Rule on Non-Compete Agreements is a federal regulation that prohibits employers across all states from using non-compete clauses with their employees and independent contractors.

This rule marks a significant shift in labor policy, aiming to enhance career mobility and reduce restrictions that limit workers from moving freely within their industry sectors or starting new ventures.

The legislation is part of broader efforts to foster innovation, raise wages, and boost economic dynamics by allowing more freedom for individuals to apply their skills where they choose without contractual limitations.

Non-Compete Rule Sample

Before you start creating your Non-Compete Rule form, it's a good idea to review a sample first. This will help you understand what the legal document should look like and what it should include.

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Non Compete Rule Sample

How Does the FTC Non-Compete Rule Work

The FTC Non-Compete Rule prevents employers from creating or enforcing non-compete agreements with employees and independent contractors. This rule targets these agreements at a national level.

Under the rule, non-competes are considered automatically illegal with very few exceptions, such as in cases related to the sale of a business. Employers must also issue written notices to employees, clearly stating that past non-compete agreements will no longer be enforced.

Effective Date of Rule on Non-Compete

On April 23, 2024, the FTC issued its final rule changing how non-compete agreements are handled nationwide. This new rule will start on September 4th, 2024. The final rule adopts a different approach for senior executives than other workers. For senior executives, existing non-competes can remain in force, while existing noncompetes with other workers are not enforceable after the effective date.

Non-Compete Rule Exceptions

The FTC's new rule generally prohibits non-compete agreements, but there are key exceptions that permit their use under specific circumstances:

Senior Executives

This exception applies to senior executives with an existing non-compete agreement involved in key decisions.

Senior executives are defined as individuals who (1) were “in a policy-making position” and (2) received a total annual compensation of at least $151,164 in the preceding year.

Bona Fide Business Sale Exception

Non-competes during the sale of a business by a substantial owner of, or substantial member or substantial partner in, the business entity are permitted by this exception.

Existing Causes of Action

The rule does not apply to a cause of action related to a non-compete clause that accrued before the effective date.

Other Significant Exceptions

The rule does not apply to entities not subject to the jurisdiction of the FTC, such as non-profit organizations.

The not-for-profit jurisdictional exemption requires that there be an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests.

Additionally, the rule does not apply to franchisee/franchisor contracts.

These exceptions are designed to balance the protection of workers' employment mobility with the need for businesses to protect sensitive information and investments in certain high-stakes situations.

What To Include in a Non-Compete Rule

When creating a Non-Compete Rule due to the new FTC regulations, you must include certain details to meet legal standards and ensure employees understand the changes.

  1. Effective date: Clearly state when non-compete clauses will stop being enforced.
  2. Definition of non-compete: Explain that employees can work for a competitor, start similar businesses, or compete after leaving the company.
  3. Employer identification: Name the employer to whom the rule applies.
  4. Scope of non-enforcement: Specify that the non-compete clause will not be enforced in any way.
  5. Exclusions and obligations: Mention that other agreements like confidentiality remain in effect.
  6. Resource for more information: Provide a link or directions to additional information about the rule.

These elements ensure the Non-Compete Rule document is thorough, follows the FTC’s guidelines, and is understandable, helping to avoid future disputes and create a transparent workplace.

FAQs About Rule Banning Noncompetes

Explore our FAQs below for a detailed look at the complexities of the FTC Non-Compete Rule.

Are Non-Compete Agreements Void Right Now?

Non-compete agreements are not immediately void with the FTC's new rule. The Non-Compete Rule effective date is still unknown as of today. Only agreements made after they go into effect will be prohibited. Existing non-competes remain valid until the rule's effective date.

Employers must then rescind prohibited non-competes by the compliance deadline set by the FTC. This process ensures that all agreements comply with the new federal standards progressively, not instantaneously.

Is the Non-Compete Rule Retroactive?

The FTC's new rule on non-compete agreements is not retroactive. It applies only to agreements made after the rule takes effect. This means that existing non-compete agreements are not impacted directly by this rule.

However, employers are required to rescind existing non-competes that fall under the scope of the rule by a specific compliance date, thereby affecting existing agreements from that point forward.

Does This Rule Replace State Laws Regarding Non-Competes?

The new FTC rule banning non-compete clauses does not replace state laws. Instead, it establishes a federal baseline. States can enforce stricter rules about non-competes. Employers must follow both state and federal laws and use the stricter rules where they apply. This ensures that even if state laws are less strict, the federal rule offers a consistent level of protection against non-compete clauses across the country.

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