The End of Non-Competes: What Employers Must Do

The Federal Trade Commission (FTC) recently took a historic swing at employment contracts by issuing a final rule to ban non-compete clauses nationwide. While legal battles have created a complex timeline for implementation, the message to the business world is clear. The era of restricting where employees can work next is coming to a close. HR departments and business owners must prepare now to protect their interests without relying on these traditional restrictive covenants.

Understanding the FTC’s Final Rule

In April 2024, the FTC voted 3-2 to finalize a rule that effectively prohibits employers from entering into new non-compete agreements with workers. The agency determined that these clauses are an unfair method of competition. According to FTC estimates, banning these clauses could increase worker wages by up to $488 billion over the next decade and help create more than 8,500 new businesses each year.

The scope of this rule is broad. It defines a non-compete clause as any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking work after their employment ends.

This rule applies to:

• All Employees: This includes full-time and part-time staff.
• Independent Contractors: Gig workers and consultants are protected.
• Volunteers and Interns: Unpaid workers are also covered.

The Status of the Ban: Is It in Effect?

It is vital to understand the current legal status before shredding your contracts. The rule was originally scheduled to go into effect on September 4, 2024. However, in late August 2024, a federal judge in Texas (Judge Ada Brown in Ryan LLC v. Federal Trade Commission) issued a ruling that set aside the FTC’s ban. This ruling blocked the ban from taking effect nationwide.

Despite this nationwide injunction, employers are not in the clear. The FTC may appeal this decision, and the regulatory pressure on non-competes is higher than ever. Furthermore, specific states have their own bans that supersede federal delays.

States with existing bans or severe restrictions include:

• California
• Minnesota
• North Dakota
• Oklahoma

If you operate in these jurisdictions, federal court rulings do not save your non-compete agreements. They are already void.

Specific Requirements for HR Departments

While the federal ban is currently stalled in the courts, prudent HR departments are treating this as a wake-up call to audit and rewrite employment agreements. If the ban (or a modified version of it) eventually survives the appeals process, or if you operate in a state that restricts these covenants, here is what is required.

1. The Notice Requirement

Under the FTC rule, employers were required to provide “clear and conspicuous” notice to workers with existing non-competes that those clauses are no longer enforceable. The FTC even provided model language for this notice.

If the ban is reinstated, you must deliver this notice via email, text message, or paper mail to the worker’s last known address. You cannot simply update an employee handbook; direct communication is required.

2. The Senior Executive Exception

The rule created a specific carve-out for “senior executives.” The FTC defines a senior executive as a worker who:

1. Earns more than $151,164 annually.
2. Is in a “policy-making position” (such as a President, CEO, or equivalent officer).

For these individuals, existing non-competes entered into before the rule’s effective date can remain in force. However, employers are banned from creating new non-competes with senior executives going forward.

Valid Alternatives to Non-Competes

Business owners often worry that without non-competes, their trade secrets will walk out the door to a competitor. Fortunately, there are legal ways to protect your business that do not violate the FTC’s intended rules or state laws.

Non-Disclosure Agreements (NDAs)

You can still require employees to sign confidentiality agreements or NDAs. These contracts prevent employees from sharing proprietary information, client lists, or trade secrets. The key is that the NDA must not be so broad that it effectively functions as a non-compete. For example, preventing an employee from using “general industry knowledge” is too broad and likely unenforceable.

Non-Solicitation Agreements

Non-solicitation clauses are generally distinct from non-competes. These agreements prevent a departing employee from trying to poach your clients or recruit your current employees.

• Customer Non-Solicits: Prevent the former employee from contacting your customers to sell them services.
• Employee Non-Solicits: Prevent the former employee from hiring away your team members.

Trade Secret Laws

Federal and state laws already protect your intellectual property. The Defend Trade Secrets Act (DTSA) allows companies to sue in federal court if trade secrets are misappropriated. To rely on this, you must take reasonable measures to keep the information secret, such as password protections, limited access, and labeling documents “Confidential.”

“Garden Leave” Provisions

This is a popular alternative in the finance sector. Instead of a non-compete, the employee remains on the payroll for a notice period (e.g., 90 days) but does not perform any work. Because they are still technically employed and receiving a salary, they cannot work for a competitor during this time. This gives the company time to transition client relationships.

Frequently Asked Questions

Does the ban apply to the sale of a business? Yes, there is a specific exception. The FTC rule allows non-compete clauses entered into by a person pursuant to a “bona fide sale of a business entity.” If you are buying a company, you can still require the seller to sign a non-compete to ensure they don’t open a rival shop next door immediately after the sale.

Can I get sued for having non-competes in old contracts? Under the proposed FTC rule, simply having the language in a contract wasn’t a violation, but enforcing it or telling an employee they are bound by it would be. However, in states like California, even including a non-compete in an employment contract can be considered a civil violation.

Are non-solicitation agreements banned too? Not explicitly. However, the FTC stated that if a non-solicitation agreement is so restrictive that it practically functions as a non-compete (e.g., preventing a salesperson from contacting 90% of the potential clients in a region), it could be scrutinized under the same regulations.

What should I do right now? Audit your current workforce. Identify who has a non-compete and whether they fall under the “senior executive” definition ($151,164+ salary and policy-making power). Draft new employment agreements that rely on strong NDAs and non-solicitation clauses rather than non-competes. This prepares you for future regulations and ensures compliance with increasingly strict state laws.