On August 24, 2023, we published a blog post on a proposed bill before the New York State Assembly that would ban non-competition agreements in New York. Since then, the bill passed the vote before the Assembly, but Governor Hochul vetoed the bill on December 22, 2023. While the status of a New York state law on non-competes is unclear, at the federal level, the Federal Trade Commission (“FTC”) recently issued a final rule that bans non-competes nationwide with incredibly limited exceptions on employers that enter into or attempt to enforce any new or existing agreements. 

Why Has the FTC Targeted Non-Competes?

In various press releases, the FTC explained why it has implemented this new rule. The FTC believes that non-compete clauses keep wages low, suppress new ideas and rob the American economy of dynamism. The FTC estimates that its rule will create over 8,500 new businesses each year, will result in 17,000-29,000 more patents each year, and typical workers can expect to earn $524 more per year. 

How Does This New Rule Affect Employers?

The FTC estimates that about 30 million people in the United States are currently covered by non-competition agreements, which means that the new rule will affect a large number of employers. The rule is set to go into effect on September 4, 2024. On that date, the rule will prohibit employers from entering into new non-competes with employees and prohibit employers from attempting to enforce any current non-compete agreements. Additionally, employers are required to provide notice to any employees under an existing non-compete agreement that it would not be enforced. The final rule includes model language for employers to use in their notices to such employees.

There are certain exceptions to this rule. For example, any senior executives who are in a “policy-making position” and make more than $151,164.00 are exempt from the ban on non-competition agreements. Further, non-competes are also allowed between the sellers and buyers of a business. 

What Are the Penalties for Non-Compliance?

It appears that the FTC cannot seek a civil penalty against an employer that is not complying with the rule. This rule was created under Section 5 and 6(g) of the FTC Act. Neither section permits the FTC to impose civil penalties. However, Section 5(b) permits the Commission to pursue an adjudication against a non-complying employer or the FTC may seek an injunction pursuant to Section 13(b) against a non-complying employer. If an employer refuses to comply with any form of a cease-and-desist order against it by the Commission, the employer then may be subject to monetary sanctions. These sanctions would be determined by whichever federal court body imposed the cease-and-desist order. It is unclear how high the penalties may be at this time.

What Steps Should Employers Take?

Several lawsuits have been brought challenging the FTC’s ban on non-competition agreements. However, it is important to be prepared and discuss your situation with an attorney now. If you believe that this rule affects your rights or responsibilities as either an employer or employee, please contact one of our trusted attorneys.