Home Blog Understanding and Addressing the Federal Trade Commission’s Non-Compete Clause Rule

Understanding and Addressing the Federal Trade Commission’s Non-Compete Clause Rule

July 02, 2024
Federal building and Federal Trade Commission emblem.

Human resources managers have long used non-compete agreements, or covenants not to compete, to protect the interests of employers and businesses. Non-compete agreements typically limit an employee’s ability to work at a competing job for a competing for a fixed amount of time after they leave their place of employment. On April 23, 2024, the Federal Trade Commission issued a final rule—the Non-Compete Clause Rule—to ban non-compete agreements nationwide.1 The FTC’s ban is currently being challenged in federal court, but it is part of a larger trend of limiting the use and enforceability of non-compete agreements.

Read on to learn more about how non-compete agreements are regulated across the United States, and how human resources professionals should consider addressing this new rule.

Non-Compete Agreements Are Contracts: What Is a Contract?

What is a non-compete agreement? Non-compete agreements are contracts that bind employees after they leave a company and limit the ability to work for a competitor in the same business or to start a competing business on their own. As contracts, the validity of non-compete agreements depends upon whether they fulfill the elements of a standard contract.

A contract is an enforceable promise between two or more parties. Enforceable promises, or contracts, can only be made between parties that have the capacity to make a contract. Some individuals lack the capacity to make a contract. For example, minors are not permitted to make a binding contract. Similarly, individuals who are considered mentally incompetent also may not make a binding contract without the permission of a guardian.

Contracts can only be made in relation to appropriate subject matter. Contracts can be made for many reasons, but there are certain kinds of contracts that are prohibited by law because they are against public policy. For example, traditionally courts have been hesitant to enforce contracts between couples for domestic services and sex because such agreements are against public policy.2

Consideration in Contracts

In order to be enforceable promises, the contract must reflect a meeting of the minds between two parties. The promise in a contract must be undergirded by consideration. Consideration is a bargained-for value that each party contributes in exchange to make the agreement binding. It can be in the form of a payment of money or an agreement to stop accepting offers from competing parties. Consideration is of value because both parties willingly give up something of value to ensure that the contract is binding upon both individuals. Consideration in contracts not to compete is fairly simple to achieve. The continued promise of a job by an employer and the continued employment of an employee who is not looking for another job is often considered adequate to create a binding agreement between the parties.

Non-Compete Laws by State

Contractual non-compete agreements have been widely used in the United States. The Federal Trade Commission estimates that 20% of employees are subject to non-compete agreements.3 Less than 1% of those non-competes apply to highly compensated senior executives.3

Even without the FTC ban on non-compete agreements, such agreements are currently disfavored in many states. State legislatures have taken action to limit the enforceability of non-compete agreements against employees. Some states have banned non-compete agreements completely. Other states have limited the use of non-compete agreements only to highly paid employees. Some states permit non-compete agreements, but only if they are reasonable.

Broad Prohibitions on Non-Compete Agreements: California

Some states, like California, have enacted a ban against non-compete agreements. Courts in California refused to enforce non-compete agreements, even when they were enacted in other states. California Assembly Bill 1076 prohibits non-compete agreements, rendering them unlawful and unenforceable.4 As part of this regime, employers were required to provide individualized notice to inform employees that non-compete agreements are void in the state of California by February 14, 2024. Employers that failed to provide notice to employees about the unenforceability of current non-compete agreements were subject to fines.

In 2023, New York State’s legislature passed a similar bill limiting the broad use of non-compete agreements; however, after pressure from business interests, Governor Hochul vetoed the bill.5

Enforceable Non-Compete Agreements Against Highly Paid Employees: Colorado and Illinois

In other jurisdictions, like Colorado, non-compete agreements are only available on a limited basis. In 2022, Colorado passed a law limiting employer use of non-compete agreements in most circumstances. Employers may not use non-compete agreements on employees making less than $112,500.

Illinois has taken a similar path with the passage of the Illinois Freedom to Work Act, which prohibited non-compete agreements between employers and employees when the employees earn less than $75,000 a year. Recently, numerous bills have been passed to place more restrictions on non-compete agreements in Illinois, including HB 5385, which would prohibit the enforcement of non-compete agreements in the state of Illinois even when the agreements are made out of state.

Non-Compete Agreements Must Be Reasonable: Other Jurisdictions

In other jurisdictions, employers have been able to use non-compete agreements to protect their interests. However, non-compete agreements have only been enforced if they are reasonable. In order to balance the interests of employers in protecting their business and trade secrets and the interests of employees in moving freely in the employment market, non-compete agreements in jurisdictions that permit them must be reasonable.

There are two dimensions to reasonableness:

  1. Duration: Non-compete agreements may not be enforceable if they are of an unlimited duration 
  2. Geographic scope: Non-compete agreements may not be reasonable if they are too geographically broad. For example, nationwide non-compete agreements are often unenforceable

Emerging Federal Law Regarding Non-Compete Agreements

Historically, the law regulating non-compete agreements and covenants not to compete has emerged from the states. States, which have sophisticated bodies of contract law to draw on have been the site of analyzing the enforceability of non-compete agreements. Against the backdrop of the state laws governing non-compete agreements, federal agencies have determined that non-compete agreements may be nationally unenforceable. Under President Biden, federal agencies have determined that most workers should not be bound by non-compete agreements or covenants not to compete.

In 2023, the General Counsel of the National Labor Relations Board issued a memo expressing the view that covenants not to compete in employment contracts are unlawful because they violate Section 7 of the National Labor Relations Act. According to the General Counsel, except in limited circumstances, non-compete agreements unlawfully interfere with the rights of employers to exercise their rights to bargain collectively. Employees subject to non-compete agreements are also often limited in their ability to threaten to leave a job in order to improve working conditions or to start a new business that may compete with their previous employer. For this reason, the General Counsel of the National Labor Relations Board determined that the use of non-compete agreements may be an unfair labor practice.

In April of 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements nationwide. According to the FTC, the ban on non-compete agreements has three purposes:

  1. It is designed to protect the freedom of workers to change jobs in the employment marketplace 
  2. The ban on non-compete agreements will ensure competition in the marketplace as employees seek new roles without restrictions 
  3. The FTC adopted the rule to facilitate the creation of new businesses 

The FTC ban on non-compete agreements does have its limits. Existing non-compete agreements that have been signed by senior executives in policy-making positions who make more than $151,164 dollars annually may be enforceable. However, most other non-compete agreements remain unenforceable under the FTC’s newly issued rule. Under the FTC’s rule, non-compete agreements are not enforceable even in the case of highly compensated senior executives.

The final rule also has limited enforceability for industries and organizations not subject to the FTC’s oversight. The ban on non-competes does not apply to most non-profit entities, unless the non-profit corporation carries on for-profit business to benefit itself or its members. Further, the FTC’s final rule does not apply to banks, credit unions, or financial institutions. Common carriers in the transportation industry, like railroads and airlines, are also exempt from the ban on non-competes.

The rule has not yet become applicable. It is set to take effect 120 days from the publication of the final rule. There may be another impediment to its implementation.6 The U.S. Chamber of Commerce brought suit in the Eastern District of Texas to stop the FTC’s new rule, arguing that the agency does not have authority to issue such a rule. This issue is far from settled.

Tips for HR Professionals: Addressing the FTC Non-Compete Rule

If you currently work as a human resources professional, consider the following tips to address non-compete agreements ahead of the FTC’s rule going into effect:

  1. Assess your existing use of non-compete agreements and review them for enforceability 
  2. Check your state and local laws for enforceability of non-compete agreements
  3. Provide notice about whether non-compete agreements are void in line with state laws when applicable
  4. Sign up for legal alerts about non-compete agreements to keep current on the law
  5. Always consult your general counsel or outside counsel to get more clarity on how to move forward

Stay on Top of Non-Compete Agreement Regulations and More With Tulane Law Online

Federal and state laws and regulations that impact HR professionals are always changing. Tulane Law’s online Master of Jurisprudence in Labor & Employment Law program gives you the skills you need to manage these changes to ensure your workplace stays compliant. Get the legal knowledge you need to rise among the ranks of HR professionals, pushing you forward to the next level of your career.

Through our targeted curriculum, daily conversations with classmates and faculty and through your master’s capstone experience, you’ll learn practical lessons and hone new skills that you can put to immediate use. You’ll walk away with the ability to navigate the complexities of employment contracts, to read and understand legislation, to train employees, to deal effectively with unions, to engage in collective bargaining, to mediate disputes or participate in the arbitrations of labor disputes, to create personnel manuals, to lead executive searches that are EEOC-compliant and much more.

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