The FTC Bans Noncompetes
Introduction
The Federal Trade Commission (FTC) has made a landmark decision to ban noncompete agreements across the United States, a move that has sweeping implications for workers and employers alike. This decision, announced in April 2024, is designed to enhance competition, spur innovation, and provide employees with greater job mobility (Federal Trade Commission).
Scope of this Noncompete Ban Rule
The FTC’s new rule applies broadly to both existing and future noncompete agreements. For the majority of workers, noncompetes that have already been agreed upon will become unenforceable, while creating new noncompetes is prohibited. However, senior executives, representing less than 0.75% of the workforce, are treated differently. Existing noncompetes for these executives are allowed to remain in force, while new noncompetes involving them are not allowed. This distinction acknowledges the unique nature of senior executive contracts, which often reflect negotiated value.
Senior Executives and Noncompetes
The FTC has provided a specific definition for “senior executives.” This term refers to employees earning more than $151,164 annually who hold policy-making positions, such as presidents or CEOs. This definition is narrower than the Securities and Exchange Commission’s definition of “executive officer,” which has led to concerns about how this rule will be interpreted and enforced.
The rule also highlights the FTC’s intention to focus on the most restrictive agreements while allowing for some flexibility at higher levels of corporate hierarchy. Despite this distinction, all new noncompetes, even for senior executives, are prohibited moving forward.
Alternative To Noncompetes For Employers
Employers concerned about losing employees to competitors have been advised to consider alternatives to noncompete agreements. The FTC recommends nondisclosure agreements and nonsolicitation clauses, which do not functionally prevent workers from seeking new employment or starting businesses. Employers are also encouraged to explore “garden leave” arrangements, where employees receive continued compensation during a post-employment transition period.
The FTC has also provided model language for employers to use when notifying workers that their noncompetes are no longer enforceable. This notification requirement is seen as less burdensome than an active rescission requirement, which was initially proposed.
Implementation and Challenges Of This Noncompete Ban Rule
The rule is set to take effect 120 days after its publication (towards the end of August), but legal challenges may delay its implementation. Currently, several lawsuits have been filed challenging the rule’s legality, arguing that it exceeds the FTC’s authority and violates constitutional principles. For example, the U.S. Chamber of Commerce has filed a lawsuit in Texas seeking to block the rule. Given this legal landscape, employers should prepare for potential delays or changes.
Despite these challenges, employers should review their policies and prepare to notify workers who will be freed from noncompetes. This notification requirement allows employers to signal to workers that noncompetes will not be enforced. For instance, a Head of Marketing previously restricted by a noncompete may now find new career opportunities, because, even though they may make more than $151,164 annually, they would not be considered as holding a “policy-making position” (as per MUCH Law, in this article)
ACCUR Recruiting Services’ Perspective
At ACCUR Recruiting Services, we have observed first hand the impact of noncompete agreements, particularly in the beauty industry. These agreements, often imposed by large corporations, have hindered executives seeking career advancement. Some executives lacked the energy and motivation to challenge noncompetes, while potential employers often avoided the hassle. The new rule is expected to ease these challenges, providing executives with greater career mobility.
In our experience, noncompetes have been a significant barrier, especially for high-performing executives in industries like beauty, where large groups dominate. The new FTC rule offers hope for a more dynamic and competitive job market, aligning with our commitment to helping executives grow their careers in a more flexible and open environment.
