By Meaghan Murphy, Esq.

Last week, the Federal Trade Commission (FTC) voted 3-2 to implement a total ban on noncompete agreements for nearly all workers across the country. Noncompete agreements generally prohibit workers from moving to or starting competing businesses for a designated period of time. According to the FTC, 30 million people — roughly one in five workers — are now subject to noncompete agreements.

There is no doubt that a federal ban on noncompetes would significantly impact relationships between employers and workers, but we will have to wait to see if the already-filed and soon-to-be-filed legal challenges to the rule delay, limit or prevent its implementation altogether.

How Did We Get Here?

Noncompete agreements have long been the subject of intense debate. Some view them as a critical way to protect confidential and proprietary business information, while others view them as stifling the rights of workers to freely change jobs. Back in January 2023, when FTC officials first proposed a noncompete ban, they asserted that by limiting workers’ ability to switch jobs for higher pay (among other reasons), it reduces employee mobility within the job market.  According to the FTC, this disadvantages workers covered by these agreements who are seeking work as well as businesses looking to hire employees. The result, the FTC argued, hurts the economy overall and violates the FTC Act, which prohibits unfair methods of competition.

Over the last 15 months, the FTC received more than 26,000 comments on the proposed rule. An incredible 25,000 of those comments supported the FTC’s proposed ban. Since then, the FTC sorted through the comments, made some changes to the proposed rule, and then issued the final rule on April 23, 2024. Unless thwarted by legal challenges, the final rule is set to take effect on September 4, 2024.

What Does The Rule Actually Say?

The FTC’s final rule is 570 pages. There is a lot to it. For now, here are the most important things employers should know:

1. The term “worker” includes employees and individuals classified as independent contractors and other kinds of workers.
2. For workers other than “senior executives,” it is unlawful to enter into, enforce or represent that a worker is subject to a noncompete agreement. In other words, all noncompete agreements between employers and workers (except as described below) will be invalid when the rule goes into effect. To be clear, the rule as applied to workers other than senior executives, is both retrospective and prospective, which means noncompete agreements entered into both before and after this final rule goes into effect are unlawful.
3. For “senior executives,” which are defined as those in “a policy-making position” earning more than $154,161 annually, it is unlawful to enter into new noncompete agreements after the effective date of the rule, enforce such an agreement or represent that a senior executive is subject to one entered into after the effective date. Current noncompete agreements for senior executives will be allowed to stay in effect even after the effective date of the rule.
4. The rule places an affirmative obligation on employers to provide clear and conspicuous notice to workers with existing noncompetes that those agreements will not be enforced against them. The FTC included model language for sufficient notice in the rule, which notice must be delivered via paper, mail, email, or text.
5. The rule does not generally impact nondisclosure/confidentiality agreements or non-solicitation agreements, unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business. In other words, as long as they are not worded so broadly as to essentially be noncompete agreement, they are lawful.
6. There are some exceptions. The rule does not apply to workers at nonprofits. Noncompetes between franchisors and franchisees are exempted, so any such agreements remain lawful to have or enter into in the future. Same goes for noncompetes between the seller and buyer of a business.

Not surprisingly, some issues are less clear. For example, we don’t know whether the FTC will consider noncompete agreements that provide financial incentives for employees to stay employed as unlawful. Employers will need to wait for more guidance from the FTC or a court decision interpreting the scope of the rule (if we ever get there).

Legal Challenges

Many perceive the final rule as overstepping by the FTC. The U.S. Chamber of Commerce (Chamber) – which touts itself as the world’s largest business association advocacy group – has already announced its intention to file a lawsuit to block the rule. The Chamber emphasized that noncompete agreements are – and should continue to be – upheld or struck down under well-established state laws, and further, that such a broad rule applied to all businesses across all sectors, is not appropriate for the FTC to implement unilaterally.

In addition to the Chamber of Commerce’s promised lawsuit, a global tax services and software provider based in Dallas is challenging the rule in a federal district court in Texas. According to that company, non-competes are an important tool for firms to protect its intellectual property and foster innovation, and the FTC rule would upend businesses’ ability to do both.

These lawsuits (and others that may come) have the potential to delay the effective date of the rule (likely by way of a nation-wide injunction) or limit its implementation or prevent it entirely.

How Does The Rule Interact With Existing State Laws?

If states have more restrictive rules governing noncompetes, they will continue to apply. But there aren’t many states that have gone further than this FTC rule. One example is the State of California, which (with a few narrow exceptions) prohibits noncompete agreements for all workers.

Although Massachusetts has not gone as far as California, employers in the Commonwealth are no doubt aware of the significant restrictions on the use of noncompete agreements ushered in by the Massachusetts Noncompetition Agreement Act (MNAA), which became effective on October 1, 2018. The MNAA was prospective only, and so it applies to all noncompete agreements entered into on or after October 1, 2018. Among other things, the MNAA prohibits noncompete agreements for non-exempt workers, undergraduate or graduate students in (paid or unpaid) internships or other short-term employment, employees who have been terminated without cause or laid off, and employees who are age 18 or younger. The MNAA still allows employers to enter into noncompete agreements with exempt workers, subject to certain procedural requirements, so long as they receive a mutually agreed-upon amount of financial compensation and the duration is no more than 1 year.  However, unless the situation falls within one of the exemptions listed above, businesses in Massachusetts will be further restricted by the FTC rule. While existing agreements with workers who fall within the definition of “senior executive” under the FTC rule will continue to be enforceable, Massachusetts employers will not be able to enforce any current agreements with workers who are not “senior executives” after September 4, 2024. Notably, not all exempt workers are “senior executives.” Further, Massachusetts employers will not be able to enter into noncompete agreements with any workers – senior executives or not – after September 4, 2024.

What Should Employers Do Now?

Employers should review all existing noncompete agreements to determine whether they will pass muster under the new FTC rule. Businesses should also monitor the status of the FTC’s rule. If it becomes effective in its current form, employers may need to issue notices compliant with the rule to those workers that fall within its protections, and refrain from requiring noncompetes be signed by any workers in the future. Employers should also consider whether employment agreements other than a noncompete, such as nondisclosure/confidentiality agreements or non-solicitation agreements, will achieve the same or similar goals as noncompete agreements – without violating the law.