The FTC rule banning post-employment noncompetes was published in the Federal Register on May 7, which means the rule will take effect on September 4, 2024, unless pending lawsuits to void the rule are successful.

Despite considerable uncertainty around when, or even whether, the rule will apply, employers should prepare now so as not to be caught flatfooted. The first step is to understand the rule’s parameters and potential impact on your business. Our FAQs guide you through the intricacies of the rule and the steps you should take while waiting for the lawsuits challenging the rule to be resolved.

Application of the Rule to Workers

1. Does the rule apply to B2B noncompetes?

No, the FTC rule does not apply to business-to-business (B2B) noncompetes. Instead, existing federal antitrust laws should continue to be considered when evaluating B2B noncompetes.

2. Does the rule apply to all workers?

No, there are limited exceptions. First, the rule does not invalidate existing noncompete agreements (i.e. agreements entered into on or before the effective date of September 4, 2024) with “senior executives.” After that date, new noncompetes with all US employees will be prohibited.

“Senior executive” means a worker who 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) and who is in a “policy-making position.”

• “Total annual compensation” 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.
• Those in a “policy-making position” may include the President, CEO or equivalent, or others with “policy-making authority,” meaning “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.” In the Supplementary Information to the rule (the FTC’s commentary on the rule), the Commission notes “many executives in what is often called the ‘C-suite’ will likely be senior executives if they are making decisions that have a significant impact on the business, such as important policies that affect most or all of the business. Partners in a business, such as physician partners of an independent physician practice, would also generally qualify as senior executives under the duties prong, assuming the partners have authority to make policy decisions about the business.”

Second, the rule does not apply to workers outside of the United States. See FAQ 11 below.

3. Does the rule apply to independent contractors?

Yes. The rule defines “worker” broadly to include employees, independent contractors, externs, interns, volunteers, apprentices and certain sole proprietors. It does not include a franchisee in the context of a franchisee-franchisor relationship.

4. Is there a sale of business exception?

Yes. Noncompetes entered into by a person pursuant to a “bona fide sale” of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets are excluded. The rule does not include an ownership threshold or qualifying percentage.

While the text of the rule does not define a “bona fide sale,” the Supplementary Information explains that it is:

One that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale. So-called ‘springing’ non-competes and non-competes arising out of repurchase rights or mandatory stock redemption programs are not entered into pursuant to a bona fide sale because, in each case, the worker has no good will that they are exchanging for the non-compete or knowledge of or ability to negotiate the terms or conditions of the sale at the time of contracting. Similarly, sham transactions between wholly owned subsidiaries are not bona fide sales because they are not made between two independent parties.

While the rule exempts noncompetes in a “bona fide sale,” companies must still consider applicable state law limitations or defined exceptions.

Implications for Other Covenants with Workers

The rule does not categorically prohibit nondisclosure, non-solicitation, and similar restrictive covenants. However, the regulation’s definition of  “noncompete clause” includes “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work.

The rule makes clear that it applies to any terms or conditions that require a worker to pay a penalty for engaging in competition, including liquidated damages, forfeiture-for-competition clauses, and severance agreements that condition payment of severance on compliance with a noncompete.

The FTC also included the “functions to prevent” language to capture overly broad covenants of any sort. Any term or condition that is “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends” will be deemed a prohibited noncompete. Thus, certain employment terms not included in noncompete covenants could be deemed prohibited under the rule. While we include directional guidance here, this determination is ultimately a fact-specific inquiry, and the rule purposefully gives the FTC broad discretion in its interpretation.

5. Are nondisclosure agreements (NDAs) prohibited by the rule?

No, “garden-variety” NDAs are not categorically prohibited. The Supplementary Information notes that NDAs designed to protect trade secrets or other business information with economic value are not prohibited.

However, if a NDA is so overbroad that it effectively prevents a worker from seeking or accepting employment or operating a business, it is prohibited under the rule. Examples of problematic NDAs include: (1) an agreement barring a worker from disclosing any information “usable in” or relating to the industry in which they work; and (2) an agreement barring a worker from disclosing any information obtained during their employment, including publicly available information. The scope of information that cannot be disclosed is key to determining if an NDA will be considered a prohibited noncompete under the rule.

6. Are proprietary information and invention assignment agreements (PIIAs) prohibited by the rule?

No, PIIAs are also not categorically prohibited. The Supplementary Information lists “invention assignment agreements” as an allowable alternative to noncompetes to protect company trade secrets and other confidential information. But, similar to NDAs, if the scope of “proprietary information” is drafted too broadly, the PIIA could be considered a prohibited noncompete under the rule.

7. Are nonsolicitation agreements prohibited by the rule?

No, nonsolicitation agreements (whether for customers or employees) are not categorically prohibited. However, they too may require a fact-specific analysis because if the nonsolicit is too onerous in scope, it could be deemed a functional noncompete. Similarly, no-hire and no-business agreements are also not categorically prohibited but may be subject to a fact-specific analysis.

8. Are agreements requiring repayment of a bonus or to forfeit accrued sick leave after leaving a job prohibited by the rule?

No, agreements requiring workers to repay a bonus or forfeit accrued sick leave after leaving a job do not meet the definition of noncompete clause under the rule so long as they do not penalize or function to prevent a worker from seeking or accepting work or operating a business after the worker leaves the job. Note, however, that certain penalty for competition clauses are prohibited, e.g. a post-termination equity award vesting provision that is contingent on compliance with a noncompete with a forfeiture of the award if the former employee breaches the noncompete.

9. Are “garden leave” agreements prohibited by the rule?

Probably not. The Supplementary Information states that a “garden leave” agreement where the worker is “still employed and receiving the same total annual compensation and benefits on a pro rata basis—is not a noncompete clause,” since such an agreement does not restrict the worker post-employment. Thus, garden leave provisions whereby an employee remains employed (with full salary and benefits) but is simply not allowed to access the business during the garden leave period should still be permissible, as long as the worker is free to pursue alternative employment if desired.

The focus of the rule is on post-employment restrictions. It does not prohibit either fixed term employment agreements or any restraints on current employment (i.e. moonlighting).

10. Are training repayment agreement provisions (TRAP) prohibited by the rule?

Possibly. The Supplementary Information explains that where required training-related repayment is not “reasonably related to the costs the employer incurred to train the worker,” it is a functionally a noncompete.

Further Ins and Outs

11. Does the rule apply to noncompetes that restrict work outside the US?

No. It only applies to work and workers in the US.

12. Does the rule apply to handbooks and workplace policies?

Yes. The definition of noncompete clause is not limited to contract clauses. The rule’s prohibition applies to all forms a noncompete might take, including workplace policies or handbooks and implied contracts.

13. Are pending causes of action based on an existing noncompete invalid as of the rule’s effective date?

No. The rule does not invalidate a cause of action related to a noncompete provision if that cause of action accrued prior to the effective date. Actions taken before the effective date—for example, enforcing an existing noncompete or making representations related to an existing noncompete—are not unfair methods of competition under the rule.

Five Summer To-Dos for Employers

The earliest the rule could become effective is September 4, and this could change depending on the pending litigation.

Accordingly, this summer, we recommend partnering with counsel to:

1. Take inventory of all current noncompete agreements with employees, senior executives and independent contractors. Consider targeted action to mitigate the impact of the rule with key workers who may not meet the definition of “senior executive” (e.g. employing “garden leave” arrangements or other permissible alternatives).

2. Because the rule does not invalidate noncompete clauses with senior executives entered into on or before the effective date, employers may wish to review whether any employees who qualify as senior executives are not yet subject to a noncompete clause but should be (subject to applicable state law).

3. Be sure to expand the noncompete inventory analysis beyond stand-alone noncompete agreements to include any employment policies or handbooks that purport to bind workers to noncompetes and consider possible revisions.

Check offer letters, employment agreements, PIIAs, stock option and other equity award agreements, severance arrangements, and other compensation-related agreements. Carefully review all employment documentation for language that may have the effect of a noncompete to determine whether the term could be prohibited if/when the rule takes effect.

4. Prioritize the most valuable confidential business information and/or trade secrets the company wants to protect and work with counsel to adopt the best strategy to safeguard the assets.

5. Prepare to provide the mandatory notice. Companies with existing noncompetes with workers who are not “senior executives” must provide such workers with notice that their noncompetes are no longer enforceable as of the rule’s effective date. Notice can be delivered by email, text message, or a paper notice by hand or mail–and if the employer has no contact information for the former worker, no notice is required. This decision point may take some time to execute and thus is worth attending to ahead of time.