The Federal Ban on Non-Competes: Fact vs. Fiction and Next Steps

The Federal Trade Commission (FTC) recently issued a final rule prohibiting non-competition clauses. This news has spread quickly, but so has misinformation. We answer the most common questions.

The hands of a man reading a contract at a desk.

On April 23, 2024, after reviewing over 26,000 comments from the public, the Federal Trade Commission (FTC) issued a final rule banning non-competition agreements (also known as “non-competes”) for most employees and independent contractors. 

If you’re an employer who has used non-competition clauses, are your hands now tied in enforcing them? If you’re an employee, can you tear up your agreement and go to work for the rival practice down the street? 

Many of our clients have called our law firm with questions about the new rule. A few have brought along some misunderstandings gleaned from social media, their peers, or even their own employees. 

Without question, a federal, near-total prohibition on non-competition agreements is a big deal. But before you make any changes to your practice or leave your job, ensure you know the timeline, the requirements, and how you can prepare.

Questions From Employers

Q: Does the FTC’s rule mean that my current employees and independent contractors have been released immediately from their non-competes?

A: Not at all! The new rule is scheduled to go into effect on September 4, 2024. Also, current lawsuits from the U.S. Chamber of Commerce and others could push the date back. 

After the effective date, existing non-competes will become non-enforceable, except for those of “senior executives,” which we’ll discuss in more detail shortly.

Q: If a worker breaches their non-compete today, does that mean I have only until the effective date to file a lawsuit?

A: Any breaches that occur before the effective date are still enforceable (i.e., subject to a breach of contract lawsuit), even after the effective date. 

Q: My healthcare practice has only one or two workers. Did the FTC include any exceptions for me?

A: All for-profit employers are subject to the ban, regardless of size, industry, or the contractor/employee status of their workers.

Q: Does the FTC’s ban on non-competes pertain to workers at all levels?

A: After the effective date, new non-competes become unenforceable for all workers, regardless of pay level or responsibilities. 

However, there is a narrow exception for existing non-competition agreements (that is, non-completes signed before the effective date) for senior executives. These individuals, defined as employees who earn above $151,164 per year in policy-making positions, will remain bound to their old non-competes even after the effective date. This exception pertains to under 1% of workers, though.

Q: I employ workers in a state that already limits or bans non-competes. Does the federal rule affect me?

A: Until the federal law goes into effect, follow the state laws. As we approach the effective date, it’s a good idea to speak to your attorney to get a comprehensive look at how the state and federal laws fit together.

For example, in Illinois, the existing ban on non-competes is limited to workers below a certain pay threshold. Remember, the federal rule covers workers at all pay levels (except senior executives with pre-existing non-competes). Once the federal rule goes into effect, the more restrictive guidelines will apply, and non-competes will become unenforceable for most high-income individuals.

See our related article: “The New Illinois Limits on Non-Competes: Do They Affect You?

In contrast, California already has a near-total ban on non-competition agreements, with very narrow exceptions. Note that “senior executives,” as defined by the FTC, are not exempt under California law. Again, employers will need to follow the more stringent guidelines, which, in this case, are the state’s. Thus, although the federal rule allows it, California employers cannot enforce pre-existing non-competes for senior executives unless one of the state exceptions also applies.

Q: Should I re-write my existing contracts with my staff to remove the non-competition clauses?

A: The FTC rule does not require employers to strike the clauses from existing contracts. However, employers must notify affected workers that the clauses are no longer enforceable.  The FTC offered model language for this communication but allows employers to develop their own language and provide written notification by email, text, by hand, or via mail.

Q: As an employer, what should I be doing now?

A: You can certainly wait to see how things pan out. Court challenges already exist, and more may follow. The effective date may be postponed as the lawsuits move through the system. It’s also possible that the challenges could succeed in blocking the new rule from going into effect at all.

To be more proactive, start by identifying which of your current employees and independent contractors have non-competition agreements so that you’ll know whom to notify when the time comes. And while there’s no requirement to discuss the new rule with them now, it might be helpful to share the facts if social media misinformation has led them to believe that their non-competes are instantly invalid. 

Work with your attorney to develop employment and independent contractor contracts for future workers. Your attorney can incorporate other protections, such as non-disclosure agreements and non-solicitation clauses (carefully crafted to avoid violating state laws or acting as a non-competition clause).  

Questions From Employees and Independent Contractors

Q: If I violate my existing non-compete now, am I safe from a lawsuit?

A: Violating a non-competition agreement before the new rule’s effective date is still considered a breach of contract, and the employer can still hit you with a lawsuit —  even after the rule goes into effect. The upcoming ban may soften employers’ will to litigate, but it’s still risky. 

See our related video, “Employment Breaches of Contract.”

Q: After the effective date, should I ask my employer for a revised contract without a non-compete clause?

A: There’s no need to remove the non-competition language from your existing contract. It will simply become unenforceable unless you are a senior executive, defined as a worker earning above $151,164 per year in a policy-making position. 

Q: What about my contract’s non-solicitation clauses and other language restricting what I can do or say after I leave?

A: The FTC ban on non-competes does not directly address the enforceability of non-solicitation clauses, non-disclosure agreements (NDAs), or other “restrictive covenants,” as they are called. However, the language of restrictive covenants must be carefully written so as not to function as a non-compete. Plus, as we discussed earlier, your state laws may already limit the use of non-solicitation clauses and NDAs.

If you are working under an employment or independent contractor agreement and it includes additional restrictive covenants, it’s a good idea to speak with a lawyer before you accept a new position. 

Q: An employer just offered me a job in a state that still allows non-competition clauses, and there’s one in the contract. Can I just go ahead and sign it, knowing that it will be meaningless soon?

A: Never sign a contract hoping the other party can’t or won’t enforce it! In the specific case of non-competes, several organizations are challenging the rule in federal court. These lawsuits could delay or even completely derail the ban, in which case your new non-compete will remain enforceable for the near future or beyond.

Q: The FTC’s new rule covers all for-profit businesses. What if I’m employed by a nonprofit?

A: Nonprofit organizations are not subject to the FTC’s rule. However, the FTC has warned that they will enforce the ban when nonprofits “act like for-profits.”  As a result, many nonprofit hospital legal departments are scrambling to assess their situations. 

Suppose you’re a party to an existing non-compete with a private non-profit hospital. In that case, the picture may become clearer by the effective date, especially if your employer decides it’s safer to release employees from their non-competes. Meanwhile, if you’re negotiating a new contract with a non-profit health system, the uncertainty may make the prospective employer more flexible on including a non-competition clause.

Get Legal Support

Your attorney can help you keep your contracts up-to-date with current law. If you operate in any of the states where we have licensed attorneys, our firm can develop up-to-date employment contracts suited to your healthcare practice or business. We also help medical professionals plan their exits and review contracts with prospective employers. Reach out for a free consultation to learn more.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

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