The Federal Trade Commission (FTC) on Tuesday, April 23, issued its final rule that prevents most employers from enforcing noncompetes against workers. The 3-2 vote by commissioners comes nearly a year and a half after the rule was first proposed. In that time, the agency received more than 26,000 public comments to the proposed rule.

The final rule applies nationwide and proactively prohibits employers from entering into noncompete clauses with most workers and requires employers to rescind most existing noncompete clauses. The rule preempts all inconsistent state and local laws or regulations. According to the FTC, noncompetes violate longstanding federal law prohibiting unfair methods of competition.

The rule is set to go into effect 120 days after it is published, however lawsuits have already been filed to enjoin enforcement of the law on the same day the rule was issued. In addition to other suits, the U.S. Chamber of Commerce filed a lawsuit Wednesday challenging the rule and the FTC’s power to enforce it. This means companies should pay close attention to how those legal challenges develop as the rule’s effective date gets closer.

Here's a look at the notable changes to the final rule and what else employers should know about Tuesday’s vote.

Notable Changes: Senior Executives and Bona Fide Sales

The FTC did not entirely ignore concerns raised by the multitude of commentators. One notable change to the final rule from its first iteration is a key distinction between senior executives and all other workers. The final rule bans new noncompetes for all workers, and prohibits enforcement of noncompetes against most workers but includes a carveout for existing noncompete agreements with "senior executives," which are allowed to remain in effect.

Senior executives are defined as workers earning more than $151,164 a year and who work in a "policy-making position." The FTC estimates fewer than 1% of workers are considered senior executives.

The final rule also includes an exception for noncompetes ancillary to the sale of a business. The original proposed rule included an exception for noncompetes entered into by a substantial owner as part of the sale of a business, and defined substantial owner to mean an owner, member, or partner holding at least a 25% ownership interest. The final rule removed the 25% requirement and instead applies to anyone signing a noncompete as part of a bona fide sale. 

What Else Employers Should Know About Final Rule

To comply with the final rule, employers will be required to stop enforcing existing noncompetes as of the effective date with workers other than senior executives. Employers are also required to provide clear and conspicuous notice — by the effective date — to workers that they will not be enforcing noncompetes, an attorney for the FTC said before Tuesday’s vote.

Importantly, employers will not need to rescind or modify all existing noncompete agreements — they are simply prevented from enforcing them. However, employers who include noncompete provisions in their employee handbooks will need to revise those policies, otherwise they wouldn’t be able to share the document with new hires. Despite the fact that most handbooks directly disclaim that company policy creates a contract with employees, many employers still include noncompete policies in handbooks. If so, they would need to change the document to meet the final rule’s obligations.

Issuing of the final rule will not impact employers or employees who are currently facing lawsuits regarding noncompete clauses. The rule addresses commenters’ concerns about retroactive application by confirming that it would not impact claims for breach of contract that accrued prior to the rule’s effectiveness.

What Happens Next

Employers should expect a period of uncertainty in the coming weeks and months. With legal challenges underway, it will be up to the courts to decide whether the final rule is deemed unlawful — the U.S. Chamber of Commerce has previously described the rule as unlawful.

For businesses, Tuesday’s vote is another clear indication of a growing national trend against agreements that overly restrict employee activity after termination. However, not all such restrictions were targeted by the FTC in this rulemaking. Nondisclosure agreements, non-solicitation of customer agreements, and non-solicitation of employee agreements remain available to help protect key business relationships, and to prevent proprietary information like trade secrets from leaving the door when an employee leaves.

Now is a good time for employers to review their restrictive covenants with outside counsel to evaluate the impact of the final rule, ensure enforceability of the most important restrictions, and consider different strategies such as confidentiality agreements and non-solicitation agreements to achieve and protect business goals.

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