Are Noncompete Agreements Illegal Now?

On April 23, 2024, the Federal Trade Commission (“FTC”) issued its Final Rule prohibiting non-compete clauses in all agreements between employers and workers. This rule:

Prohibits all new non-competition agreements nationwide with employees and contractors.
Voids most existing noncompetition agreements in place with employees and contractors.
Allows existing noncompetition agreements with “senior executives” (an individual who (1) is in a policy-making position; and (2) had a total annual compensation of at least $151,164 in the preceding year) to stay in effect until the underlying contract expires. The existing executive agreement cannot be extended.

The rule goes into effect 120 days after publication of the Final Rule in the Federal Register.

The language is sweeping: Section 910.1 of the Final Rule defines “non-compete clause” as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting work after the conclusion of employment, or operating a business after the conclusion of employment.

This rule does not apply to noncompete agreements in connection with a bona fide sale of a business.

What do small business owners need to do?

If you have used noncompetition provisions with your employees, you should review your employment contracts with your lawyer. Some provisions will need to be rewritten. If you modify an existing agreement, you will need to provide additional consideration to the employee in the form of a bonus or additional employee benefits.
You will need to send a notice to existing workers who have noncompete provisions telling them the noncompete provisions are no longer enforceable.
You can have carefully crafted contracts to identify and protect business trade secrets and confidential information.
You can have carefully crafted provisions to prohibit solicitation of clients, workers and vendors.
Existing lawsuits alleging violations of noncompetition provisions can continue.

Expect a lawsuit will be filed to contest this rule, and that this rule may be paused while the lawsuit is resolved. Noncompete agreements have always been disfavored by courts, who don't want to tell someone they cannot work. It would not be surprising if a court upholds severe limitations on what can be in a noncompete agreement and who they can be applied to. Currently under North Carolina law, a noncompete agreement must be limited in time and geography, and must be drafted to protect a legitimate business interest.

In the meantime, smart business owners will proactively revisit their employment and contractor agreements.