Why It’s Time to Say Goodbye to Noncompete Agreements: A Guide for Employers and EmployeesGood Riddance to Noncompete Agreements
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a new rule intended to protect employees and promote competition by banning noncompete agreements nationwide. This new rule becomes effective on September 4, 2025. The FTC explained the reasoning behind the law, stating “[n]oncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.” Moreover, “[t]he FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year [and] is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade.” 1
There are many forms of “restrictive covenants” in employment agreements, but noncompetes are the most detrimental to employees and do the least to protect the legitimate interests of the employer. Essentially, noncompetes prohibit an employee from working for any competitor of the employer or starting a business that competes with the employer in a defined geographic area for a set period of time after the termination of employment. Noncompetes often make it impossible for an employee to find new employment in their field of expertise, forcing them to either move outside the geographic area or accept employment in a different field, usually for less money.
The FTC’s new rule will allow existing noncompete agreements with senior executives (workers earning more than $151,164,00 annually and who are in policy-making provisions) to remain in effect, but prohibits employers from entering into new noncompete agreements with senior executives. The rule also allows the enforcement of existing and new noncompete agreements in connection with the sale of a business or its assets. The rule has a retroactive effect, meaning even if the noncompete agreements were entered into before the rule was passed, they are still unenforceable. The rule further requires employers to give their employees notice that any noncompete agreements they may be a party to are now unenforceable.
The rule does not prohibit other forms of restrictive covenants, such as confidentiality and non-solicitation agreements, which are considered more narrowly tailed to protect the legitimate interests of an employer.
This new rule has already been challenged in court, so there is a chance that a court will enjoin its enforcement pending a final determination as to the validity of the rule.
If you’re an employee in need of guidance regarding an existing restrictive covenant, or if you’re an employer looking to ensure you’re in compliance with the rule and still protecting your legitimate interests, please contact Michael H Ansell, Esq., via email or telephone, to discuss retaining NextGen Counsel LLC.
Information contained in this post is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular situation, we urge you to consult with Michael H Ansell, Esq., or other competent legal counsel.
NextGen is not engaged in the providing of tax advice. NextGen does not offer, nor profess to provide any information or advice regarding the application or impact of federal, state, or local tax statutes, regulations, ordinances, guidelines, advisory opinions or other requirements or information provided by governmental agencies and authorities. NextGen strongly recommends that you consult with your tax professional regarding the applicability and impact of the foregoing.