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Non-compete agreements have been banned. What businesses need to know

Your employees and contractors are about to start asking questions

On April 23, 2024 the Federal Trade Commission (FTC) announced a final rule banning non-compete agreements in the United States. Here is what U.S. business owners need to know:

Does this apply to my business?

The rule applies to all work in the United States regardless of whether the people working for you are employees, independent contractors, interns, volunteers, or apprentices. The rule applies whether the workers are paid or unpaid.

What does the rule say?

The rule makes non-compete agreements illegal in the U.S. The FTC has defined non-competes broadly as any term or condition (written or oral) that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(a) seeking or accepting work in the United States with a different person if such work would begin after the conclusion of the current employment; or 

(b) operating a business in the United States after the conclusion of the current employment.  

When does the rule take effect?

The date that a rule takes effect is called the “effective date”. The effective date for this rule will be 120 days after the rule is published in the federal register.

What am I required to do as a business owner?

Business owners have until the effective date of the rule to notify everyone who works for them (employees, independent contractors, interns, volunteers, and apprentices) that their non-compete agreements are no longer valid. The FTC has provided model language and instructions for providing this notice to your workers. As long as you follow the FTC’s rules, you are in the clear. 

Are there any exceptions to the rule? 

The rule does not apply to:

  • Franchisees in the context of a franchisee-franchisor relationship. 

  • Senior executives who entered into the non-compete agreement before the effective date of the rule (the FTC defines who counts as a “senior executive”)

  • Non-compete agreements related to the bona fide sale of a business. “Bona fide sale of a business” includes the sale of a person’s ownership in the business or substantially all of the business entity’s operating assets. 

  • Existing causes of action (e.g. lawsuits) related to a non-compete clause that accrued prior to the effective date of the rule. 

What happens now?

Big policy changes such as this are always followed by lawsuits. There will no doubt be multiple lawsuits around this new Non-Compete Law and it will be a long time before the dust settles. That being said business owners should prepare to obey this new law so that they don’t have to play catch-up later. Now is a good time to check-in with your business lawyer so you know what you need to do and how to have these conversations with your workers. 

Thanks for reading the Bevel Law Blog! While this information is hopefully helpful to you, nothing in this blog is intended to be legal advice. Always consult a lawyer before making any legal decisions based on topics in this blog.

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