FTC Approves Final Rule to Ban Non-Compete Agreements in Employment Contracts

Nebraska courts, with very limited exception, will not enforce non-competition agreements, viewing them as an impermissible restraint on trade. On the federal level, the National Labor Relations Board (“NLRB”) has attempted to regulate non-competition agreements for employees covered by the National Labor Relations Act (“NLRA”). However, the NLRA does not apply to managerial and supervisory employees.

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a new Rule banning non-compete agreements in all employment contexts. The new Rule will become effective 120 days after it is published in the Federal Register but is expected to face legal challenges that could delay its effective date. The Rule prohibits for-profit employers from entering into non-competes with any paid or unpaid employee, including senior executives, or independent contractors or representing to any employee that the employee is subject to a non-compete. Once the Rule becomes effective, it will prohibit employers from imposing non-competes on workers, and the ban will extend to all contract provisions that create “functional” non-compete clauses, i.e., any other contractual clause that may have the “effect” of prohibiting workers from seeking or accepting other employment.

A “non-compete clause” includes a “term or condition” of employment that “prohibits,” “penalizes,” or “functions to prevent a worker from” seeking or accepting work after the end of their employment. The FTC Rule provides that whether a specific contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.” If the Rule survives, we anticipate there will be significant litigation to determine whether customer non-solicitation and non-disclosure agreements constitute prohibited non-competes by effectively “prohibiting the worker from seeking or accepting employment.”

Employers may continue to enforce existing non-competes with senior executives, who are defined as those in policymaking positions earning more than $151,164 annually. The Rule also permits limited use of non-compete agreements between franchisees and franchisors. The Rule does not prohibit non-competition agreements entered into by a person during a bona fide sale of a business or the person’s ownership interest in a business entity or of all or substantially all of a business’s operating assets.

Employers must notify all other current and former employees who are not senior executives that any existing non-competes are no longer enforceable before the Rule becomes effective. The FTC has provided model language to satisfy the notice obligation. Covered employers have until the effective date to come into compliance with the Rule. The Rule provides that the use of non-competes is an “unfair method of competition” that violates Section 5 of the FTC Act. Violations of the FTC Act can result in fines, penalties, and other injunctive relief. Undoubtedly, the FTC’s Rule will face legal challenges. Whether the Rule is, ultimately, enforceable may not be determined for some time.

If you have questions regarding this or other labor and employment-related legal issues, reach out to our Labor and Employment Law team for assistance.