On May 7, 2024, the Federal Trade Commission (FTC) made a significant move to enhance worker mobility and competition by officially publishing a rule that bans non-compete agreements across all for-profit sectors. This new regulation will come into effect 120 days following its publication, marking a pivotal shift in employment law.
A non-compete clause is a part of a contract that prevents employees from working for competing businesses or starting similar businesses for a specific time after they leave a company. The FTC argues that non-compete agreements have traditionally hindered economic choice by restricting workers from moving freely between job opportunities, suppressing wage growth, and stifling innovation. By abolishing these agreements, the FTC anticipates a boost in economic power and innovation.
The newly enacted rule prohibits for-profit employers from entering new non-compete agreements with any of their employees, including senior executives. This is a dramatic shift from past practices, where non-compete clauses were commonly used to restrict employees from joining competitors or starting similar businesses shortly after leaving a company. However, the rule maintains that existing non-compete agreements with senior executives will remain enforceable. Employers are mandated to notify all other employees that any existing non-competes will no longer be enforceable from the rule’s effective date.
The new FTC rule banning non-compete agreements has sparked controversy and expects to encounter legal challenges. Critics, including prominent organizations like the U.S. Chamber of Commerce, contend that the rule oversteps the FTC’s legal authority and undermines the longstanding expectations of both employers and employees. There are widespread concerns that implementing this rule could disrupt traditional business practices and the principles of contract law.
With the rule set to take effect on September 4, 2024, businesses must act swiftly to ensure compliance. This involves revising employment contracts and communicating effectively with employees about the status of their non-compete clauses. It is crucial for employers and employees to stay educated in the rule’s developments and consult legal experts to grasp its implications. This change is a pivotal moment in employment law, potentially reshaping how businesses and workers negotiate terms of employment and mobility.
By Bridgette Bradley, MSM, SHRM-CP
