Stay Ahead of Uncertainty: How the FTC's New Ban on Non-Compete Provisions Impacts Your Business & Strategies You Can Adopt to Help Prepare for This Major Regulation

By: Erwin J. Shustak, Managing Partner, and Melissa Donaldson, Law Clerk       


The FTC's new rule banning most non-compete provisions, which takes effect September 4, 2024, will materially transform the employment landscape. The rule is a sweeping change affecting most industries and takes effect at the end of the summer. Now is the time for all employers to become familiar with this law and prepare for its impacts. For employers, this rule will materially impact employment agreements and will result in less protection for business interests. Employers must review and revise all standardized employment and related agreements and have an obligation to notify current and former employees whose agreements contain what will soon be unenforceable non-compete provisions.

For employees, on the other hand, the rule is expected to have major changes in the job market, opening up new opportunities and potentially higher wages for employees who previously were bound by what will soon be unenforceable, unlawful non-compete provisions.

While legal challenges to the rule have been filed, which ultimately may delay or overturn the law, every employer must take immediate steps to assess their employment agreements, practices, and ensure they will comply with this law. Failing to act now may expose employers to penalties and severe legal consequences. All employment compliance strategies must be assessed and modified to meet the requirements of this law.

Understanding the Rule

What Does the Rule Say?

Snapshot: After September 4th, employers no longer can require employees- no matter how senior or sensitive their positions may be- to sign non-compete provisions, and all existing non-compete provisions are deemed invalid, unlawful, and unenforceable, with certain, limited exceptions as discussed below.

Deeper Dive: The FTC's rule stops employers from creating non-compete provisions with employees, whether standalone agreements or contained within an employment agreement, and makes existing non-compete provisions unenforceable. The rule broadly defines non-compete provisions as any term, written or oral, preventing an employee from pursuing work elsewhere. This includes not allowing an employee to work for a competitor or to start a similar business within a specific period or area.

The rule applies to most industries and workers, including full-time and part-time employees, contractors, interns, volunteers, and apprentices. There is an exception for non-compete provisions with “senior executives” if they were signed before the rule’s effective date. Employers must also inform employees with non-compete provisions that these are no longer valid. Applicability and exceptions are discussed below.

The rule also has a severability clause, meaning any part found invalid or unenforceable, like a specific restriction, can be removed without affecting the legality of the rest. This clause is important as the rule faces several legal hurdles.

Why Did the FTC Issue the Rule?

Snapshot: The FTC is banning non-compete provisions to prevent unfair competition and improve job opportunities.

Deeper Dive: According to the FTC, one in five US workers is affected by a non-compete provision. Non-compete provisions originally were used to stop highly paid experts from sharing trade secrets or stealing clients. But non-compete provisions are now common across all employment levels. The FTC sees this as an unfair limit on competition, as they leave low-level employees with limited job choices, weaker negotiating power, and restricted career mobility. By eliminating most non-compete provisions, the FTC expects wages to increase by $300 billion a year and job prospects to improve for thirty million Americans. The FTC also says other restrictive agreements, such as non-disclosure agreements (NDAs) and non-solicitation agreements, can protect business interests without overly restricting employees like non-compete provisions do.

Why Does the Rule Matter?

Snapshot: The rule marks a major shift from past FTC actions by broadly banning most non-compete provisions, as earlier efforts were determined case-by-case and more permissive.

Deeper Dive: The FTC's non-compete rule marks a significant change in employment law. Previously, the FTC enforced non-compete laws on a case-by-case basis. Now, this rule imposes a notification requirement for employees bound by non-compete provisions- a new approach compared to the FTC's previous, more reactive measures. The rule also defines non-compete provisions broadly, covering any agreement that restricts employees from seeking or accepting jobs elsewhere after leaving a company. This includes competition clauses in incentive plans and equity agreements. Such a broad definition was not part of earlier FTC policies. And while the rule does include some exceptions, they are narrow and differ from past, less specific criteria. The rule also overrides any inconsistent state laws, a move away from the FTC’s deference to state law.

State governments and Congress have encouraged tighter restrictions on non-competes, as seen in recent proposals like the Workforce Mobility Act of 2023 and the Freedom to Compete Act of 2023. Thus, the FTC rule not only diverges from historical trends but also supports the continuing direction of employment law.

What Gives the FTC Authority to Enact the Rule?

Snapshot: The FTC Act, which prohibits unfair competition, gives the FTC power to ban non-competes.

Deeper Dive: The FTC's authority to ban non-compete provisions is based on Sections 5 and 6(g) of the FTC Act. Section 5 makes unfair methods of competition illegal and gives the FTC wide authority to tackle anti-competitive practices. Section 6(g) gives the FTC power to set rules for enforcing the Act's provisions, including prohibiting the practices outlined in Section 5.

The non-compete rule is part of the FTC's interpretation of its power to address harmful competition practices, as the FTC views non-compete provisions as unfair competition restrictions. The FTC states using its rulemaking authority this way aligns with historical practices, pointing to earlier rules and legal decisions supporting its powers under Section 6(g). In releasing this rule, the FTC notes its approach matches those of other federal agencies and has been explicitly recognized by Congress through amendments to the FTC Act. The FTC also defends the rule with research showing non-compete provisions suppress wages, hinder job mobility, and curb innovation.

What Are the Arguments Against the Rule’s Enactment?

Snapshot: Critics argue the FTC overstepped its authority with the non-compete ban, questioning both the process and substance of the rule.

Deeper Dive: The FTC’s non-compete rule was approved by a 3-2 vote and sparked considerable debate, including three lawsuits: Ryan, LLC v. Federal Trade Commission; Chamber of Commerce v. Federal Trade Commission; and ATS Tree Services, LLC v. Federal Trade Commission. Like many critics, these lawsuits argue the FTC lacks authority to completely ban non-compete provisions. A decision on the preliminary injunction request for ATS Tree Services, LLC will be issued by July 23, 2024.  The court in the Ryan LLC and Chamber of Commerce lawsuits, which were combined due to their similar legal theories, issued a preliminary injunction on July 3, 2024, barring FTC’s enforcement of the rule against the named plaintiffs. While the Ryan LLC court declined to impose a nationwide injunction at this stage, it stated a decision on the case’s merits will be issued before August 30, 2024. These lawsuits’ main points of contention include:

Overreach of Authority: Critics claim the FTC’s broad non-compete ban exceeds its powers under the FTC Act, arguing the Act only allows the FTC to issue procedural rules, not sweeping substantive ones. They also claim that, based on the major questions doctrine, the FTC lacks the explicit congressional approval required for such a significant regulation.

Constitutional Concerns: Opponents argue the rule violates the Constitution. They believe Congress granting the FTC power to make such substantive rules is an improper delegation of legislative power. They also raise Fifth Amendment concerns, saying the rule strips employers of constitutional rights by making existing non-compete provisions unenforceable without due process or fair compensation.

Violations of the Administrative Procedure Act (APA): Critics say the rule violates the APA because it is arbitrary and capricious. They argue the FTC did not adequately assess its economic impact, as the APA requires, and disregarded the competitive benefits of non-compete provisions, such as protecting trade secrets and encouraging investment in employees.

Preemption of State Law: The rule’s preemption of state law, as discussed below, is another point of contention. Critics argue non-competes are customarily governed by state law, and the rule discounts this authority and ignores the legal framework already in place at the state level.

Economic Impacts: Opponents believe the rule will have adverse economic effects, such as lowering incentives for businesses to invest in their employees. Critics also say it will  disrupt employment practices, particularly in sectors that rely heavily on non-competes, like technology and healthcare. Moreover, they are concerned the rule’s vague terms will create confusion and significant compliance costs for employers navigating the changes.

Scope and Application

What Are the Requirements of the Rule?

Snapshot: The rule makes existing non-compete provisions unenforceable, except for senior executives, and prohibits new non-competes. Employers must notify impacted employees that non-compete provisions are no longer enforceable.

Deeper Dive: The FTC's rule imposes strict requirements on the use and enforcement of non-compete provisions:

No New Non-competes: New non-compete provisions are prohibited after the rule’s effective date. This applies to all employees, including senior executives, and covers all employment-related documents, such as employee handbooks and workplace policies.

No Enforcing Non-competes: Existing non-compete provisions, except senior executive provisions, are unenforceable after the rule's effective date. Attempting or threatening to enforce them is also prohibited.

Notify Employees: Employers must notify affected current and former employees that their non-compete provisions are no longer enforceable. This notification must be sent before the rule’s effective date and can be delivered via email, text message, or written notice. More discussion about this requirement is below.

When Does the Rule Take Effect?

Snapshot: The rule takes effect on September 4, 2024, but legal challenges may delay or overturn it.

Deeper Dive: The FTC's non-compete rule becomes effective on September 4, 2024. As mentioned above, legal and political challenges may delay or block its implementation. The pending lawsuits’ outcome are uncertain, but a decision on delaying the rule is expected by July, which is two months before the rule’s effective date.

Additionally, two recent Supreme Court cases (Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Com.) overturned Chevron deference, a major administrative law principle that told courts to defer to agencies’ interpretations of ambiguous laws if their interpretation is reasonable. Without Chevron deference, courts may reverse an agency’s interpretation of its authority, including the FTC's authority to issue the non-compete rule. Employers must follow these developments, as they could alter when and how the rule is implemented.

What Is Covered by the Rule?

Snapshot: With limited exceptions, the rule covers any post-employment restriction for most employees.  

Deeper Dive: The FTC's non-compete rule covers any post-employment restriction, except for existing restrictions on senior executives, and this coverage applies to all employee types and most industries:

Covered Provisions and Terms. The rule applies to new and existing non-compete provisions that restrict current or former employees. This includes written and oral restrictions as well as restrictions in company documents, such as employee handbooks or workplace policies. The FTC says any post-employment term prohibiting, penalizing, or functioning to prevent an employee from working elsewhere or starting a business is a prohibited non-compete provision.

  • Prohibiting Terms. A term expressly prohibiting employees from finding another job or starting a business after leaving is a non-compete provision. For example, an employment contract preventing a restaurant employee from working at local competing restaurants for two years after they leave is a prohibiting term. Most non-compete provisions fall into this category.
  • Penalizing Terms. A term imposing penalties on employees if they work in a competing role or start a similar business after leaving is a non-compete provision. This includes terms imposing post-employment fines or requiring forfeiture of promised bonuses or severances.
  • Terms Functioning to Prevent. A term functioning to prevent employees from working is a non-compete provision, even if not explicitly stated as non-compete. For example, an NDA prohibiting an employee from using any industry-related knowledge gained at that job functions to prevent the employee from working elsewhere because any relevant job would require the employee to use at least some of that knowledge.

Covered Individuals and Entities. The rule covers all employee types, regardless of title, job duties, or legal status, including interns, volunteers, independent contractors, and sole proprietors providing services to others. The rule covers most employers with some exceptions, as detailed below. Industries exempt from the FTC’s authority and non-compete provisions linked to the legitimate sale of a business are not covered by the rule. The rule also does not cover franchisees in their capacity as business owners, although franchise employees are covered.

What Are the Rule’s Exemptions?

Snapshot: The rule permits some non-compete provisions, such as preexisting agreements with senior executives, agreements made for the sale of a business, and legal actions taken before the rule's effective date. It also exempts abroad operations and certain industries and businesses.

Deeper Dive: The FTC's non-compete rule provides various exceptions, and the FTC Act exempts certain industries and entities from FTC authority. Several implicit exceptions are also worth highlighting:

Preexisting Senior Executive Non-competes. Non-compete provisions with senior executives signed before the rule’s effective date are exempt. Senior executives are defined as employees in policy-making positions who earn over $151,164 annually. Non-compete provisions with senior executives cannot be signed after the rule’s effective date.

  • Policy-making position. Non-competes signed before the rule’s effective date must be with senior executives in policy-making positions to be exempt. A policy-making position includes a company’s president, CEO, or equivalent and any role with policy-making authority. Title alone is not conclusive, and only having influence over policy does not qualify as a policy-making authority. Policy-making authority means final decision-making power over significant aspects of a business or common enterprise. Officers of subsidiaries or affiliates have policy-making authority if they have final authority over the common enterprise, but officers with final authority only at the subsidiary or affiliate level do not have policy-making authority.
  • Annual Earnings Over $151,164. Non-competes signed before the rule’s effective date must be with senior executives earning over $151,164 in total compensation to be exempt. Total compensation can include salary, commissions, and nondiscretionary bonuses. It does not include fringe benefits, such as lodging, health or life insurance payments, retirement plan contributions, or similar benefits. Total compensation considers annual earnings from the most recent 52-week year, calendar year, fiscal year, or hire anniversary year. If an employee did not work the full year, their earnings are annualized. If an employee left before the most recent year, total compensation is the amount they earned the year before they left.

Bona Fide Sale of a Business. Non-compete provisions that are part of the legitimate, or “bona fide,” sale of a business are exempt, including the sale of an ownership interest and all or most of a business's assets. These non-compete provisions protect buyers by preventing sellers from immediately establishing a competing business. The sale must be made in good faith and not used as a way to evade the non-compete rule. The sale must also be between two independent parties and allow for real negotiation. The FTC distinguishes between bona fide sales and transactions like stock repurchase rights or mandatory stock redemption programs, which are not exempt from the rule. In those cases, sellers usually do not exchange goodwill for the non-compete provision and often cannot negotiate the terms.

Prior Legal Actions: The rule does not affect lawsuits for breaches of non-compete provisions that occurred before the rule’s effective date.

Good-Faith Belief. Employers who genuinely believe they are exempt from the rule may use their good-faith belief as a defense if challenged.

FTC Act Exemptions. The FTC Act exempts some industries and institutions from FTC jurisdiction, meaning these employers are exempt from the non-compete rule. This includes banks, common carriers, air carriers, and entities under the Packers and Stockyards Act. Here is a breakdown of these exemptions:

Banking Institutions. The FTC Act exempts banks, savings and loan institutions, and Federal credit unions from FTC jurisdiction. This includes national banks, Federal Reserve member banks, and Federal Deposit Insurance Corporation (FDIC)-insured banks. Therefore, the non-compete rule does not apply to these institutions. But the FTC does regulate other financial entities like mortgage brokers, mortgage companies, creditors, and debt collectors. Parent companies, affiliates, and subsidiaries of banks and credit unions are also under FTC jurisdiction, including bank holding companies and their non-bank subsidiaries. Non-bank financial institutions like asset managers, hedge funds, and private equity firms may also be covered. Because these exemptions are complex, banking institutions must determine whether they are subject to the FTC Act, and those with employees working between banks and covered entities must be aware of the rule’s potential applicability.

Additionally, the FDIC may enforce the FTC Act on exempt institutions, as the Federal Deposit Insurance Act allows federal banking agencies to apply other laws and regulations against federally insured institutions. And the FDIC’s treatment of non-competes is aligning with the FTC’s view, as signaled by the FDIC’s suggested non-compete ban for mergers. Although the likelihood of future FDIC non-compete enforcement is unknown, exempt banks should use the FTC rule as an opportunity to evaluate their proprietary information protections.

Common Carrier Activities. The FTC Act exempts common carriers subject to the Acts to regulate commerce from FTC jurisdiction. A common carrier provides transportation or communication services to the public, such as railroad, trucking, pipeline, and telecommunication companies. These employers are exempt from FTC regulation because they are overseen by other agencies and laws such as the Interstate Commerce Act, the Federal Communications Commission (FCC), and the Surface Transportation Board. The common-carrier exemption is based on activities, meaning a common carrier is exempt only when engaging in common carrier services. Whether an activity falls under the exception is a case-by-case decision. For example, the FCC regulates the common carrier parts of a phone company, but the FTC can regulate its non-common carrier activities, such as telemarketing, consumer complaint monitoring, or using the FTC's Do Not Call Registry. Common carriers must ensure they understand which activities are subject to the FTC Act.

Airlines. The FTC Act exempts air carriers and foreign air carriers subject to part A of 49 USC Subtitle VII from FTC jurisdiction since they are regulated by the Department of Transportation and Federal Aviation Administration. This includes any airline, domestic or international, providing passenger or cargo services in the US.

Non-retail Meat Industry. The FTC Act exempts entities covered under the Packers and Stockyards Act of 1921 from FTC jurisdiction. The Packers and Stockyards Act prohibits unfair, deceptive, anti-competitive, or discriminatory practices in the non-retail meat industry, including meat packers, livestock marketers, stockyard owners, and live poultry dealers. The Packers and Stockyard Act does give some authority to the FTC, but only for the retail segment of the meat industry.

Some Nonprofits. Employers not structured for profit are not subject to FTC jurisdiction and thus the non-compete rule does not apply to these nonprofits. To determine whether an employer is exempt from the non-compete ban as a nonprofit, the FTC considers whether the organization benefits for-profit companies or individuals, how it is structured, and if it uses for-profit companies to manage it. Tax status is not decisive of whether an employer is a nonprofit for FTC purposes but being disqualified from tax-exempt status counts against an employer claiming to be a nonprofit. The FTC also examines income sources and disbursements to determine whether an employer is a for-profit business. If an employer’s income comes from charitable missions and is used to further that mission, the FTC will likely see them as a nonprofit.

Even if an employer is a nonprofit for FTC purposes, other features of the organization may preclude them from non-compete rule exemption. Nonprofit employees working with for-profit management companies, such as hospital employees using staffing firms, may fall under the non-compete rule. Nonprofits with for-profit members, like trade associations, also fall under the rule. Additionally, nonprofits paying unreasonably excessive salaries to founders, board members, or insiders may not be exempt.

Franchisees. As mentioned above, the rule does not apply to franchisees in the context of franchisee-franchisor relationships.

Overseas Restrictions. The rule does not apply to non-compete provisions only restricting work or business formation outside the United States.

Other Exempt Agreements. The rule does not categorically prohibit other employment restrictions, like clauses prohibiting current employees from working elsewhere while still at their current job. Such agreements should be narrowly tailored so they do not function as non-competes. Some examples include:

Non-solicitation agreements to refrain from soliciting a company's clients, customers, or employees during or after association with a company are allowed under the rule.

Fixed-term employment contracts with non-compete provisions covering only the employment term are allowed under the rule.

Garden leave agreements are allowed under the rule because they are not post-employment restrictions since the employee remains employed and receives the same compensation and benefits.

Severance agreements without restrictions on future employment are allowed under the rule.

Training Repayment Agreement Provisions (TRAPs) are allowed under the rule. TRAPs require employees to repay training costs if they leave the company within a specified period. To avoid functioning as non-compete provisions, TRAPs must not lock employees in for an unfair amount of time or for insufficient training.

How Does the Rule Apply to States with Existing Non-compete Laws?

Snapshot: Employers must comply with the FTC's rule and any applicable, more stringent state laws.

Deeper Dive: The FTC's rule overrides any conflicting state non-compete law. If a state law allows a non-compete now banned by the FTC’s rule, the rule overrides that state law, but states can enforce any non-compete laws that are stricter than the federal rule.  Here is the rule’s impact in different contexts:

States Without Restrictions. In states lacking specific non-compete laws, the FTC’s rule introduces a new standard all employers in these states must now follow, altering existing employment practices significantly. As a result, the rule affects these states with no non-compete laws the most.

States With Partial Restrictions. In states with some restrictions on non-competes, the federal rule will override any less restrictive state laws. This means any state law allowing a non-compete prohibited by the FTC rule will no longer apply, but any state law that is stricter than the federal rule may be enforced. Thirty-three states (plus DC) have laws partially restricting non-compete use, and employers in these states must navigate both the FTC’s rule and state-specific regulations.

States With Greater Restrictions. In states where existing laws put greater restrictions on non-competes, the FTC’s rule has little effect and reinforces existing practices because non-competes are already unenforceable. Four states (California, Minnesota, North Dakota, and Oklahoma) have laws banning non-compete provisions entirely with few exceptions. For these states, the rule’s impact will be limited.


California: Known for its stringent non-compete laws, California will see little change due to the FTC rule. The state already bans most non-compete provisions, with laws favoring worker mobility and competition over business protections. Section 16600 of the California Business and Professions Code states, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” As we’ve previously covered, California courts have upheld this stance, making nearly all non-compete provisions void, as seen in cases like Edwards v. Arthur Andersen LLP and Kolani v. Gluska. Similar to the FTC’s rule, California does allow a few exceptions, such as agreements related to the sale of a business, but the exceptions are narrowly interpreted.

New York: Unlike California, New York does not have a general statute regulating non-competes. Non-compete provisions are generally enforceable in New York if they reasonably balance employer and employee interests. The FTC rule will override this reasonable balancing test, making most non-competes unenforceable in New York. Additionally, a New York law prohibiting non-competes for broadcast employees but allowing them for management is an example of a state statute the FTC rule overrides. Since the FTC rule covers employees at all levels, previously allowed non-competes for management-level broadcast employees are now prohibited.

Preparation and Compliance

What Must Employers Do by the Effective Date?

Snapshot: Employers must notify employees of the rule's impact, review and revise employment policies, and stop making and enforcing non-compete provisions.

Deeper Dive: By September 4, 2024, the rule’s effective date, employers must complete the following tasks:

Send Notice: Employers must inform all affected employees that their non-compete provisions are no longer enforceable. This notice must be sent before the rule takes effect. Compliance requirements and factors to consider are detailed below.

Cease Creating and Enforcing Non-competes: Employers must stop creating new non-compete provisions for all employees, including senior executives, after the effective date.

Although the rule’s requirements are minimal, there are other steps employers must take before the rule’s effective date, as discussed below.

Why Should Employers Act Now?

Snapshot: Acting now prevents legal issues, ensures a smooth transition, and allows employers to seize strategic opportunities.

Deeper Dive: Even though the non-compete ban’s effective date is in a few months, employers should act now to understand its impact and act accordingly. Early preparation allows employers to plan strategically, establish alternative protections, and ensure compliance when the rule takes effect. Here are key reasons to act now:

Understanding Impacts: Employers must understand how the rule affects their business, but interpreting and applying its broad definitions and ambiguous exceptions can be challenging. Identifying which employees qualify for the senior executive exception is an involved task, and employers may need additional time to negotiate and enter agreements with exempt employees before the rule’s effective date.

Risk of Non-Compliance: Waiting until the last minute increases the risk overlooking compliance issues or failing to meet requirements. Non-compliance can lead to reputational damage, lawsuits, or penalties, and the FTC can impose fines up to $50,000 per violation. Early planning helps avoid these risks and provides time to fix issues before the transition.

Alternative Protections: Without non-compete provisions, employers must explore other ways to protect their trade secrets, employee retention, and client relationships. Employers need to ensure any alternative agreements, as discussed below, are compliant with the FTC rule and actually protecting their interests. Acting early gives employers time to develop and implement these alternatives before the non-compete rule takes effect.

Employee Negotiations: Transitioning away from non-compete provisions requires discussions with affected employees to modify or replace existing agreements, which can lead to complex and time-consuming negotiations. For example, expert technical employees with sensitive knowledge of business operations may not be covered by the senior executive exception. Thus, trade secret terms may need to be added to their employment agreements to ensure protection of company interests after the rule takes effect. And modifying these agreements likely requires specialized negotiations. Starting discussions early avoids rushed decisions and keeps trade secrets safe.

Employee Communication: Informing employees early about the rule’s impact and uncertainty supports trust and transparency. Clear and prompt communication prevents misunderstandings and allows all parties time to understand their positions and reach agreeable terms, minimizing disruptions and promoting good relationships.

Monitoring Developments: Depending on the timeline and outcome of its legal challenges, changes to the rule may occur months from now. Setting up communication channels now ensures employers stay informed so they can quickly adapt to any changes or delays in the rule’s implementation. Failing to monitor these changes also brings compliance risks. If employee notices are sent before relevant litigation is resolved, employers may have to issue revised notices as the lawsuits are decided.

What Steps Should Employers Take Before the Effective Date?

Snapshot: Employers should audit their agreements, identify senior executives, explore other protections, update policies, consult legal counsel, and monitor developments.

Deeper Dive: Although the effective date is months away and may be delayed, employers should start preparing now as if the rule will take effect as scheduled.

Take Internal Inventory. Employers should identify any non-compete provisions in their employment agreements and policies to figure what changes are needed and what strategic options are available.

Employers should also review the non-compete law of each state they do business in to understand the rule varying impacts.

Review Policies. Employers should audit their policies, including employee handbooks and  hiring policies, and prepare to remove any language that falls under the FTC’s non-compete definition. Although the rule does not require existing agreements to be revised to remove non-compete provisions, employers should also review their employment agreement templates to ensure future contracts do not include non-compete provisions.

Update Training. Beyond revising policies and agreements documents, employers may also need to revise training materials to remove any terms or procedures that function as a non-compete provision. To prevent inadvertent violations, employers should conduct training to teach relevant employees about the new requirements, particularly for any staff involved in hiring.

Review Senior Executive Agreements. While non-compete provisions for senior executives signed before the effective date will stay valid, employers should review these agreements well before the rule starts. The FTC did not clarify what it considers agreements “entered into” before the effective date, raising questions about whether modifying or amending non-compete provisions after the effective date would create a new agreement and thus violate the rule. Future litigation or agency comment may provide answers, but that clarity could come with little time left before the rule is effective. If significant changes are expected for a senior executive, such as increased authority or revised compensation structure, employers should consider revising affected senior executive non-compete provisions before the rule takes effect. This avoids the risk of violating the rule if it turns out the revision is considered “entering into” a non-compete. Employers may also want to relocate these non-compete provisions to a separate appendix so future revisions to employment agreements do not modify the non-compete provision and similarly violate the rule.

Additionally, employers should sign agreements with employees who qualify for the senior executive exception but do not have a non-compete in place. Also, if an employer is planning to hire for a position qualifying for the senior executive exception within the next year, it may be best to fill the role earlier than anticipated so a non-compete can be signed before the rule takes effect.

Explore Alternative Protections. As detailed below, employers should look into other options to protect proprietary information and client relationships, such as NDAs and non-solicitation clauses, as well as other channels of legal protection, like intellectual property (IP).

Develop Communication Plans. As discussed below, employers must prepare to notify impacted employees if and when the rule goes into effect. Depending on the outcome of the litigation, employers might need to tell employees that their non-compete provisions are still valid. Meanwhile, employers should plan to regularly update current and prospective employees about the rule’s potential effects on their agreements to reduce confusion and support transparency. Employers should also create a strategy to communicate with stakeholders like investors, partners, and customers about the steps they are taking to manage the rule’s changes.

Consult Legal Counsel. Employers should consult legal experts to ensure their compliance strategy is sound. Legal resources within an employer’s sector, such as subscribing to employment law alerts or industry-specific legal newsletters, can also provide insights on how potential regulatory shifts and litigation outcomes apply to them.

Develop A Compliance Team. Employers should appoint a compliance officer to continually assess compliance risks and develop contingency plans. Employers should also create a dedicated compliance support team to track regulatory updates, monitor legal developments, and share information throughout the organization.

How Can Employers Comply with the Notice Requirement?

Snapshot: To comply with the notice requirement, employers must inform affected past and present employees about the rule’s impact.

Deeper Dive: The FTC's rule requires employers to inform all current and former employees with active non-compete provisions, except those covered by the rule’s exemptions, about the rule’s impact. To meet this requirement, notices must state that non-compete provisions are invalid and unenforceable. Employers can use the FTC's model language to ensure compliance, which allows for mass emails without identifying individual non-compete holders. Notices can be sent via mail, text, email, or in person. If no contact information is available for an employee, the notice requirement may be waived. Methods that confirm receipt are suggested to keep records of delivery to demonstrate compliance, such as certified mail or email read-receipts.

Employers must send notifications before the rule’s effective date, September 4, 2024. That said, sending notices too early is not recommended because of ongoing legal challenges. If the rule is delayed or overturned, employers who already sent notices would need to send additional notices, creating confusion and logistical issues. Employers should prepare beforehand by compiling a list of affected employees, gathering contact information, and drafting notices. Employers should also designate a contact person to respond to any inquiries about the rule.

What Alternatives Do Employers Have to Protect Their Interests?

Snapshot: Employers can use alternative tools, like NDAs and non-solicitation agreements, to protect their interests under the rule.

Deeper Dive: By using a mix of legal tools and strategies, employers can safeguard their competitive edge without violating the FTC’s non-compete rule. Nonetheless, alternative agreements need to be well-drafted to avoid functioning as non-competes, and employers should check state laws for additional restrictions on any alternative mechanisms they pursue. Strategies to protect business interests include:

Employment Contract Clauses. Employment contracts can include other clauses to protect business interests without restricting competition. Non-solicitation clauses prevent employees from poaching customers or colleagues, which protects client relationships and labor stability. NDAs can require employees, contractors, and third parties to keep proprietary information confidential. Confidentiality clauses ensure ongoing protection of sensitive information. Invention assignment clauses secure the employer's rights to inventions developed during an employee’s tenure. These agreements should be audited to ensure they are not functioning as de facto non-competes. These agreements should also define what is and is not allowed and outline the parties’ responsibilities to maximize protections while complying with the FTC’s non-compete rule.

Intellectual Property Protection. Securing IP rights is another way to protect business interests. Patents, trademarks, and copyrights provide legal protection for inventions, designs, and creative works. Developing an IP strategy, including monitoring for infringement, maintains a company’s competitive advantage and deters unauthorized use.

Trade Secret Policies. Trade secret policies are crucial for keeping valuable information secure. Such policies should identify what constitutes trade secrets and outline measures to protect them. Establishing procedures for handling, storing, and accessing trade secret information, along with regular employee training on best practices, can bolster a company’s defenses against unauthorized disclosures and protect trade secrets.

Garden Leave Clauses. Garden leave clauses are not prohibited under the FTC’s rule since they do not impose post-employment restrictions. These clauses can prevent employees from immediately joining competitors, which can provide a buffer period for employers to manage the departure of key personnel and secure sensitive information. Under a garden leave clause, a company must keep an employee on their payroll at the same level of compensation and benefits. Arrangements where an employee receives less pay because they do not meet conditions for certain compensation, such as a bonus, may still be a garden leave clause, even if the employee’s duties or access to the workplace are significantly curtailed.

Employee Incentives. Building a strong company culture and loyalty among employees reduces the likelihood of them leaving to work for competitors. Implementing employee compensation or benefit programs, such as stock options, bonuses, or career development opportunities, can increase employee retention and make a company more attractive to potential employees.

Final Word

The FTC’s ban on non-compete provisions affects individuals and employers throughout the job market. Understanding who the rule affects and how to comply is crucial for employers to adapt and thrive. It is more crucial than ever to be well informed on the evolving legal implications of non-compete provisions. By planning for the impacts now, employers can reduce risks, ensure compliance, and prepare for any outcome.

Our firm regularly advises employees and employers on non-compete and non-solicitation provisions, including understanding and complying with FTC regulations.  If you have a situation you would like to discuss, contact Shustak Reynolds & Partners, P.C. for a confidential consultation. We can help you understand the FTC's rule, navigate the exceptions, and take the necessary steps to protect yourself and your business interests.


Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisers, IARs, broker-dealers, registered representatives, and businesses.
We can be reached in the firm’s San Diego office at (619) 696-9500.

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