On April 24, 2024, the Federal Trade Commission (FTC) issued a new ruling that essentially bans non-compete clauses across the board for employers. This decision comes after much debate recently around the enforceability of non-competes across various states, as more and more states were rendering them unenforceable or at least much more difficult to enforce.

The FTC’s ban will impact how agencies run their businesses and how they approach contracts with people who work for them. Let’s take a look at the substance of the new rule, the effects it has on employers and workers, and some alternatives that still stand in light of this ruling.

What exactly does the FTC ruling say?

The new rule makes non-compete clauses in both current and future contracts with agency workers no longer enforceable. The FTC reasons that non-competes cause unfair competition, restricting the ability of workers to leave their current jobs and start new businesses, stifling competition for labor, and thus, resulting in lower wages. The FTC’s position is that this new rule will increase earnings for workers, decrease healthcare costs, and inspire innovation with more patents and other intellectual property being created.

Well. We’re not commenting on its rationale – we’re sharing it for your context.

It’s certainly true that states have been debating the enforceability of non-competes a lot recently, with some states, like California, Oklahoma, and North Dakota, issuing nearly complete bans. Other states, including Colorado, Oregon, Rhode Island, and Maryland, have been restricting their scope and making them harder to enforce. In its final ruling, the FTC determined that state-by-state decisions were insufficient, and its ruling applies nationwide and overrides state laws that conflict with it.

It’s important to note that the rule does not just apply to employees – it applies to all “workers”. In its final rule, the FTC says that “workers” include independent contractors, interns, volunteers, apprentices, and sole proprietors, regardless of whether they are paid or unpaid.  So, agreements in place with any of these agency workers are affected.

The FTC’s ruling applies to all current contracts, except for those with senior executives who earn more than $151,164.00 per year and who are in policy-making positions. This means that if your agency currently has a contract with a worker earning less than that, the non-compete clause will be considered unenforceable, unless that worker is a senior executive. As it relates to future contracts, non-compete clauses will be unenforceable for all workers, including senior executives.

There is a notable exception to this rule – the ban will not apply in connection with the sale of a business entity. Specifically, non-competes will be enforceable (to the extent allowed under state law) against sellers of ownership interest in an entity when they own at least 25% interest in that entity.

The predicted effective date of the FTC’s regulation is early fall, but that will depend on the status of challenges that have already come its way – and expect a lot more of those. We’ll touch on these in the following sections.

What are some alternatives to non-competes?

Non-disclosures. A big concern that agencies have in the wake of this rule is how to best protect their confidential information and trade secrets, as non-competes were one of the tools to prevent the use of confidential information to compete. One of the most important ways to add protection is to make sure you have a robust confidentiality provision in your agreements, as well as a solid Non-Disclosure Agreement (NDA) in place. This confidentiality language cannot be too sweeping – it should not only clearly define what confidential information is, but also what is not considered confidential information. And, it has to clearly distinguish what is considered permissible use and what is not.

Non-solicitations. A relative of the non-compete, non-solicitation clauses work to prevent employees, contractors, and other hires from poaching workers and clients from a business. Non-solicitation clauses remain enforceable for now so long as they are reasonable in scope, meaning their duration cannot be too long and their geographic area cannot be too widespread.

Both confidentiality and non-solicitation clauses are known as restrictive covenants because they restrict a party from doing something. The FTC is effectively looking for restrictive covenants that are not overly broad and instead, are narrowly tailored to protect legitimate business interests.

What does my agency do now?

Provide notice. If you are an employer, you’ll be required to provide notice to agency workers about the FTC’s ruling and the resulting unenforceability of the non-compete clause in their contracts. The FTC has released suggested language to include in these notices, namely that: workers can seek or accept a job with any company or person even a competitor, workers can run their own businesses even if they compete, and workers are generally allowed to compete with their employer after their employment ends. This notice requirement does not mean that employers have to formally rescind the non-compete part of the contracts; it just means that employers need to notify their workers that non-competes will not be enforced. You will need to provide this notice when the rule becomes effective.

Stay updated. You will also want to follow updates related to this rule. Within hours of the ruling, two lawsuits were filed to block it, challenging the authority of the FTC to issue a substantive rule. Both lawsuits were filed in Texas – the first by Ryan, a global tax services and software provider, and the second by the U.S. Chamber of Commerce. The FTC has justified its authority to make such a substantive decision based on a 1973 case that upheld its power to do so. It will be important to stay mindful of these lawsuits as they unfold and as new challenges likely pop up.

Review your contracts and make some changes. While you are not required to remove the non-competes from current contracts, it will be in your best interest to revise your agreements so that non-compete language is removed for future hires and to incorporate any additional language related to the restrictive covenants discussed above.

The takeaway…

Whether you are an agency owner, a freelancer, or an employee, the likelihood that you have a contract with a noncompete (or other restrictive covenants) is pretty high, so this ruling affects you. Simply put, this changes the landscape of contracts and will require some changes. And it will take more than just removing the non-compete clause – other affected parts of your contract, including confidentiality and non-solicitation sections, will need to be adjusted as well. Talk with legal counsel about editing those clauses in a way that is both reasonable and protective of your agency’s interests.