Navigating the FTC’s New Noncompete Rule and What It Means for Your Business

The Federal Trade Commission (FTC) recently took significant steps towards eliminating most post-employment noncompete agreements. A revised rule, narrowly approved in April 2024, prohibits these agreements across the nation, with certain exceptions for senior executives. However, the rule’s future is uncertain, as ongoing litigation has paused its enforcement. While we await further legal developments, business owners must be prepared for potential changes.  Presently, the rule is enjoined following a legal challenge in Texas, but the FTC may appeal the ruling. Other lawsuits have emerged, with mixed rulings. For now, businesses can continue using noncompetes, but this may change depending on further court decisions, including a possible Supreme Court ruling.

Key Takeaways From the New Noncompete Rule

1. What the Rule Does:  The new FTC rule, if enforced, will prohibit employers from enforcing noncompetes against most workers. The only exception is senior executives, defined as employees earning more than $151,164 annually in policy-making positions. Employers may continue enforcing existing noncompetes for this group but cannot create new ones.
2. What the Rule Doesn’t Do:

• In-Term Noncompetes: Noncompetes that apply while a worker is still employed are not affected.
• Certain Industries and Relationships: Some entities, such as banks and certain nonprofits, are exempt from the FTC’s jurisdiction.
• Franchisees and Business Sales: Franchisees in franchise agreements and business sellers involved in legitimate sales are also exempt.

Recommendations for Business Owners

1. Review and Audit Existing Noncompete Agreements:  Conduct an audit of all existing noncompete agreements. Identify which employees are subject to noncompetes and whether they fall under the “senior executive” category and will be exempt from the rule. Also, evaluate other agreements, such as nondisclosure or non-solicitation clauses, that could be considered “functional noncompetes.”
2. Update Confidentiality and Trade Secret Protections:  With noncompetes possibly going away, now is a good time to strengthen other protections. Review and update your company’s confidentiality and nondisclosure agreements. Also, ensure that your trade secret protections are robust and in compliance with state and federal laws.
3. Prepare for Potential Changes:  While it’s unlikely that the FTC rule will take effect as written, businesses should plan for the possibility. Consider alternatives to noncompetes, such as “garden leave” provisions, where employees remain on payroll during a notice period but are restricted from competing during that time. Additionally, focus on “human capital investments” by improving employee retention through better compensation and long-term agreements.
4. Be Cautious With Enforcement:  Until the legal status of the FTC’s rule is clarified, businesses should be cautious about enforcing noncompete clauses, especially for employees who do not meet the senior executive exemption. Some courts may hesitate to enforce these agreements while the rule is under review, and businesses could face legal challenges.

Conclusion

This is a critical moment to act and ensure your business remains competitive and compliant. Although the future of noncompete agreements remains uncertain, business owners can take proactive steps to safeguard their interests. By auditing current agreements, strengthening alternative protections, and staying informed on legal developments, you can ensure your business is prepared no matter the outcome of ongoing litigation.