1. Proposed Final Rule, Generally.

On May 7th, the Federal Trade Commission (“FTC”) issued the Final Rule that will ban virtually all non-compete agreements for nearly all workers of for-profit employers (“Final Rule”). The Final Rule is scheduled to become effective on Thursday, September 4, 2024. In general, the Final Rule provides that, with respect to most workers, it is an “unfair method of competition” for an employer to (1) enter into or attempt to enter into a non-compete clause; (2) enforce or attempt to enforce a non-compete clause; or (3) represent that a worker is subject to a non-compete clause. Key provisions include:

  • Definition of “Non-Compete Clause”: The Final Rule defines a “non-compete clause” broadly to include a term or condition of employment that either “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work with a competitor, or operating a competing business. The Final Rule, therefore, captures agreements that “penalize” a worker who takes (or seeks to take) a job with a competitor. The FTC asserts that a “forfeiture for competition” clause in an incentive plan or equity agreement would be invalid under this definition. So too would a covenant in a severance agreement between an employer and employee that conditions payment on non-competition. There are, however, meaningful exclusions from the scope of a “non-compete clause.”
  • Definition of Worker: The Final Rule defines “worker” broadly to include employees, independent contractors, externs, interns, volunteers, apprentices and certain sole proprietors, and largely ignores distinctions based on the role of the worker, the trade secrets and confidential information that the worker accesses, or the bargaining power of the parties involved. A “worker” does not include a franchisee in the context of a franchisee-franchisor relationship.
  1. Exclusions and Exceptions to the Final Rule.

Senior Executive Limited Exclusion. The Final Rule allows enforcement of existing non-competes with “Senior Executives,” but prohibits employers—as of the effective date—from agreeing to or enforcing new non-competes with Senior Executives.

  • Senior Executives. The Final Rule defines “Senior Executive” to mean a worker who is in a “policy-making position” and received “total annual compensation” of at least $151,164 in the preceding year (or the equivalent amount when annualized if the worker was employed during only part of the year). Fewer that 1% of workers are estimated to be Senior Executives under the Final Rule.
  • Total Annual Compensation. A Senior Executive’s “total annual compensation” under the Final Rule may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the preceding year, but does not include the cost of, or contributions to, fringe benefit programs.
  • Preceding Year. The Final Rule allows the employer to choose to define the “preceding year” as the most recent 52-week period, the most recent calendar year, the most recent fiscal year, or the most recent anniversary of hire year.
  • Policy-Making Authority. The Final Rule also defines those in a policy-making position to include the entity’s President, CEO or equivalent, or others with “policy-making authority,” which, in turn, means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.”

Bona Fide Business Sale Exception. The Final Rule permits employers to enforce non-compete covenants that are entered pursuant to the bona fide sale of a business entity, of the person’s ownership in a business entity (owning at least 25% of the entity), or of all or substantially all of the entity’s operating assets. It adopts a broader exception for noncompete clauses that are entered into “by a person pursuant to a bona fide sale (1) of a business entity, (2) of a person’s ownership interest in a business entity, or (3) of all or substantially all of a business entity’s operating assets.” While this exception has been broadened, the FTC made clear that such non-competes are still subject to relevant state laws as well as federal antitrust law.

Existing Causes of Action. The Final Rule does not apply where a cause of action related to a non-compete clause accrues prior to the effective date.


Garden Leave. The Final Rule explains that “garden leave” and similar arrangements would not be a non-compete clause under the Final Rule, provided that the worker remains employed during the relevant period.

Non-Solicitation. The Final Rule also explains that there is no non-compete if the agreement imposes no restrictions on where the worker may work following employment. Non-solicitation covenants (as to customers or employees) and training assistance repayment agreements therefore are not categorically prohibited by the Final Rule, but employers should be mindful that these types of agreements, if too onerous in scope, may “function to prevent” a worker from competing.

Non-Profits; Financial Institutions. The Final Rule does not apply to most not-for-profit entities, and certain financial institutions, because those entities are outside the FTC’s jurisdiction.

  1. Mandatory Notice by Employers to Employees

The Final Rule imposes a substantial procedural burden on employers. In particular, with respect to an employer’s existing non-compete clauses with all workers who do not fall within the “Senior Executive” or sale-of-business exceptions, such covenants not to compete will be invalid as of the effective date. In that regard, the Final Rule requires employers, by the effective date, to provide “clear and conspicuous notice” in writing to such workers that their non-compete clauses will not be, and cannot legally be, enforced against them (and the FTC included an approved form of notice with the Final Rule). This will be an important decision point for employers, as they determine whether certain executives fall within the scope of “Senior Executives” under the Final Rule.

The Final Rule applies nationally, but neither interferes with broader protections for employees under state law, nor limits state agency and/or private enforcement under state laws. Thus, while the Final Rule expressly preempts all state statutes and case law that permit non-compete covenants, the Final Rule is not intended to displace laws in states like California, Minnesota, North Dakota, and Oklahoma, each of which prohibits or substantially restricts enforcement of non-competes to the extent they are more restrictive than the Final Rule, nor would it displace more restrictive laws that may be enacted in the future, such as in New York City.

  1. Key Takeaways for Employers

Retroactive Effects. From the FTC’s perspective, non-competes include both affirmative obligations to refrain from competition as well as forfeiture-for-competition provisions that penalize workers. Assuming no injunction prevents the rule from taking effect, employers should be mindful of the retroactive effects of the Final Rule. While non-competes entered into after the effective date would be unenforceable for all workers, existing non-competes are only unenforceable for workers who are not Senior Executives. This provides a short window of opportunity for employers to enter into enforceable non-competes with their Senior Executives, and the FTC’s rule may actually result in the introduction of new Senior Executive non-competes in that window. There are no penalties attached to employers for entering into non-competes before the effective date.

Notices. Employers should also begin to prepare notices for non-executives, which should be delivered prior to the effective date. These notifications should signal to workers that the employer no longer plans to enforce their noncompete against the worker in the future. The FTC, in the Final Rule, provides model language for employers to use as notice to workers that their non-competes are no longer enforceable. Certain elements of the required notice:

  • Clear and Conspicuous Requirement. Under the Final Rule, employers must provide “clear and conspicuous” notice by the effective date to workers bound to an existing non-compete agreement who are not Senior Executives that the non-compete agreement will not be, and cannot legally be, enforced against them in the future.
  • Delivery Method. The notice can be delivered via various methods, including (1) by hand to the worker, (2) by mail at the worker’s last known personal street address, (3) by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or (4) by text message at a mobile telephone number belonging to the worker.
  • Notice Exemption. Employers may be exempt from the notice requirement with respect to the specific worker that they do not have any record of a street address, email address, or mobile telephone number.

Alternative Protections. For employers concerned about employees leaving for competitors and taking trade secrets along with them, the FTC suggests using nondisclosure agreements. Other forms of restrictive covenants may also be employed to protect an employer’s business, as long as the restrictive covenant does not “penalize a worker” or “function to prevent a worker” from working for a different employer. Non-disclosure and non-solicitation agreements that bind employees are an option for employers that are not categorically prohibited by the Final Rule, as long as the agreement is drafted to not be so broad as to have the same functional effect as a noncompete. Such agreements are still subject to applicable state laws and other antitrust considerations.

Garden Leave. an arrangement where a worker remains employed and receives the same compensation and benefits, fixed-term employment contracts, or requirements that employees give advance notice of resignation may also continue to be options for employers, as they do not fall squarely under the Final Rule’s definition of noncompete. Similarly, the use of contingent or accrued bonuses that require repayment or loss of sick days if an employee ends their employment before a certain period of time would not be deemed non-competes under the rule so long as those conditions are not tied to who the worker can work for or their ability to start a business after leaving their current job.

  1. Concluding Remarks

The FTC’s recent Final Rule represents a significant shift in the landscape of non-compete agreements, slated to take effect on September 4th, 2024. This regulation is positioned to virtually eliminate non-compete agreements for the majority of workers within for-profit entities, barring employers from entering into, enforcing, or representing workers as being subject to such agreements. The broad definition of “worker” encompasses employees, independent contractors, interns, and others, with few exceptions. Notably, the Final Rule excludes certain arrangements like “garden leave” and does not apply to non-profit entities or certain financial institutions. While the rule does not preempt state laws, it sets a federal standard that may prompt employers to revise existing agreements and explore alternative protections like nondisclosure agreements.

For employers, navigating this new regulatory environment will require careful review and potentially significant adjustments to their practices. The Final Rule’s prohibition on non-compete agreements for most workers necessitates prompt action to comply, including providing clear written notice to affected employees. Employers must also consider alternative strategies to protect their interests, such as non-solicitation agreements and safeguarding trade secrets through other means. This regulatory change underscores the importance of staying abreast of evolving legal landscapes and adapting strategies to align with current standards and best practices