The FTC Voted to Ban Most Noncompete Agreements: How Should Businesses Respond?

Noncompete agreements cover about 30 million U.S. workers, or about 18 percent of the workforce, according to the Federal Trade Commission (FTC). But that may not be the case for much longer, as the FTC on April 23 voted to ban most new noncompete agreements, despite the objections of many pro-business organizations, including SHRM.

“SHRM has consistently advocated for allowing parties to consent to well-structured noncompete agreements versus a blanket ban on such agreements,” said Emily M. Dickens, chief of staff and head of government affairs for SHRM. “Blanket bans on noncompete agreements pose significant challenges for HR professionals tasked with safeguarding their employers’ intellectual property and preventing unfair competition.”

The FTC’s final rule also makes all existing noncompete agreements, except those covering senior executives, unenforceable and requires employers to notify current and former workers that their noncompete clauses are no longer in effect.

The rule isn’t scheduled to take effect until 120 days after it’s entered into the Federal Register, but legal challenges could delay it further or even prevent it from taking effect entirely. The U.S. Chamber of Commerce announced it intends to sue the FTC to block the rule.

The 120-day wait and the uncertainty about the fate of any legal challenges leave business leaders in a precarious position. What should organizations do in the meantime?

According to SHRM Senior Director of Knowledge Center Operations Amber Clayton, SHRM-SCP, there are four key tasks leaders should undertake now to limit their potential exposure to the rule and protect their intellectual property:

• Employers should review their policies and practices regarding noncompete agreements and any other restrictive employee agreements with their legal counsel. 
• If all employees are currently required to sign noncompete agreements, employers may want to consider excluding low-wage earners and workers who do not have access to trade secrets or other proprietary or sensitive information that could be detrimental to the business if revealed. Employers should work with legal counsel to determine whether nondisclosure and other agreements can still be enforced. 
• Employers should ensure safeguards are in place for trade secrets and other proprietary or sensitive information. For example, many employers limit employee access to information based on their role and their need to know. Employers may also shut down employees’ access to devices when they leave the company or use monitoring software to ensure information is not being shared with outside parties. 
• The rule makes an exception for agreements covering senior executives, defined as workers earning more than $151,164 annually who are in a “policy-making position.” In some cases, employers may want to increase certain employees' pay to put them above that limit so that a noncompete agreement is enforceable. Employers may want to review their employee wages now to determine whether and/or how that might impact their budget and business.

While a 2023 U.S. Government Accountability Office report found that 55 percent of businesses used noncompete agreements, employers in multiple states already had to navigate restrictions or bans on noncompete agreements. Prior to the FTC vote, four states—California, Minnesota, North Dakota and Oklahoma—banned noncompete agreements entirely, and many other states enacted restrictions, such as setting a compensation threshold or requiring advance notice.