colorful chairs

White & Case Global Non-Compete Resource Center (NCRC)

What you need to know about the current issues surrounding the enforceability of employer-employee non-compete provisions

25 min read

Although antitrust enforcers' concern for anticompetitive effects in labor markets has been escalating for some time (read our 2022 article about labor market developments here), the focus on perceived anticompetitive effects of employer/employee non-compete provisions has recently become much more acute.

Table of Contents

US FTC Rule Banning Non-Competes

On April 23, 2024, the U.S. Federal Trade Commission voted 3-2 to finalize and promulgate a rule banning most non-compete clauses in employer-employee contracts. The FTC published the final rule in the Federal Register on May 7, 2024. Absent an effective legal challenge delaying or barring enforcement, the rule will go into effect 120 days following its publication in the Federal Register (i.e., May 7, 2024), which is September 4, 2024. Companies will have to be in compliance with the rule by the effective date.

Enforcement of the rule could be delayed—or barred completely—by legal challenges, which were swiftly lodged beginning just hours after the FTC's vote approving the rule. The two dissenting commissioners, Melissa Holyoak and Andrew N. Ferguson, expressed their concern that the FTC lacks authority to promulgate this rule. Additionally, on April 22, 2024, the day before the Commission's vote, U.S. Chamber of Commerce officials vowed to immediately challenge the rule. Daryl Joseffer, the Chamber's executive vice president and chief counsel, said the Commission "simply has no authority to issue regulations prescribing unfair methods of competition." The Chamber followed through on that commitment by filing a lawsuit in the Eastern District of Texas on April 25.

The rule was first proposed on January 5, 2023. (You can read the FTC's FAQs press statement here). The only major change from the proposed rule to the final rule is an additional exception allowing existing employer-employee non-competes for senior executives to remain in place.

On May 14, 2024, the FTC hosted a webinar discussing compliance with the Final Rule.  The FTC covered the motivation behind the rule banning noncompetes, how to comply with the rule, who is covered by the rule, the definition of a noncompete, the effective date of the Final Rule, and alternatives to noncompetes.  A recording of the webinar and the slides are available here.

[back to top]

What you need to know:

  • What are the key features of the rule as passed?
    • The rule is broad. Once (and if) it goes into effect, the rule will prohibit employers from imposing non-competes on workers (including independent contractors and unpaid workers), and the ban will extend to all terms or conditions of employment that either "prohibit" a worker from, "penalize" a worker for, or "function to prevent" a worker from either seeking or accepting work in the United States with a different person, or operating a business in the United States, after their employment ends. For purposes of the rule, a term or condition of employment includes, but is not limited to, a contractual term or workplace policy, regardless of whether it is written or oral. § 910.1 of the Rule.
    • The rule requires employers to give notice that existing non-competes are no longer enforceable. In addition to preventing employers from entering into new non-compete agreements as of the effective date, the rule would also require employers to notify non-excepted employees that existing non-competes will not be, and cannot be, enforced. The rule also provides model language for this kind of notice. § 910.2(b) of the Rule.
    • There are two categories of employer-employee non-competes that are not covered (and thus not banned) by the rule.
      • Existing non-competes with Senior Executives. The rule will allow existing non-competes with senior executives to remain in force, but it bans new non-competes with senior executives.
        • The rule defines the term "senior executive" as a worker earning more than $151,164 who is in a "policy-making position."
        • Computing the compensation threshold may be more complicated than it looks. On the FTC’s May 14 webinar, the FTC indicated that the figure does not include board, lodging, payments for medical insurance, payments for life insurance, contributions to retirement plans, and other similar fringe benefits. Yet the Final Rule itself only cites provisions that comprehensively define board and lodging. It will likely take some time to define which costs may be included in the compensation threshold.
        • A "policy-making position" includes a firm's president, chief executive officer or the equivalent, any other officer with "policy-making authority," and any other natural person with "policy-making authority" similar to that of an officer's. "Policy-making authority" entails the "final authority to make policy decisions that control significant aspects of a business entity or common enterprise" but does not include "authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise." § 910.1 of the Rule.
          • Guidance that accompanies the Final Rule provides that many C-suite executives will likely be considered senior executives if these individuals have been making decisions that have a significant impact on the business as a whole. The FTC's May 14 webinar clarified this means that senior executives of a division or some other kind of sub-part of the whole business are not covered by the "senior executive" exception (and thus their existing non-competes would be voided under the rule).
      • Non-competes in "Sale of Business" agreements. Additionally, there is a narrow exception allowing non-competes in certain "sale-of-business" agreements. This exception includes bona fide sales of a business, of a person's ownership interest in a business, or of all or substantially all of a business's operating assets. § 910.3(a) of the Rule.
        • The proposed version of the rule had an exception to allow non-competes in the sale of a business where the employee owned 25% or more of the business – that provision has been removed. The final version's "sale of business" exception does not include a % ownership threshold.
    • It will supersede all contrary state laws. § 910.4(a) of the Rule.

[back to top]

  • If issued, what happens if you violate the rule?
    • The rule provides that the use of non-competes in violation of the rule is an "unfair method of competition" that violates Section 5 of the FTC Act. This means that the rule does not merely render covered employer-employee unenforceable, but rather, establishes that entering such agreements or attempting to enforce existing agreements contrary to the rule amounts to an unlawful act itself. Violations of the FTC Act can result in fines, penalties, and other injunctive relief.
  • What employers would be bound by the rule?
    • Most employers will be subject to the rule when it goes into effect. Certain entities, however, are exempt from the FTC's jurisdiction under the FTC Act (pursuant to which the FTC purports to be issuing the rule), so it follows that those exempt entities should also be exempt from the rule. Those entities generally include certain financial institutions (banks, credit unions, savings and loans), some non-profit organizations, and air carriers.
    • As explained below, however, the FTC and Department of Justice Antitrust Division have separately raised concerns about non-competes as an antitrust violation under Section 1 of the Sherman Act.
  • If it goes into effect, will the rule have any impact on NDAs and other restrictive covenants in employment contracts?
    • Though the rule does not categorically prohibit NDAs, training repayment agreement provisions, or non-solicitation agreements, the FTC notes that such agreements could fall within the ban's ambit if they are "so broad and onerous" that they have "the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business." An example of such an agreement, provided by the FTC, "may include an NDA that bars a worker from disclosing, in any future job, and information that is 'usable in' or 'relates to' the industry in which they work." See pp. 80-85 of the Rule.

[back to top]

  • How does the final rule differ from the FTC's initial proposal?
    • After announcing the Commission's proposed rule, the FTC invited public comments on its proposal through April 19, 2023. A total of 16,459 comments were lodged. Leading themes included (1) the adverse impact on the protection of intellectual property (IP) and the absence of any IP exception to the proposed non-compete ban; (2) the proposed rule's tendency to disincentivize investments in worker training; and (3) concerns that non-profit healthcare providers would be unfairly advantaged by the proposed rule since they are exempt from it.
    • Based on the differences between the FTC's initial proposal and the final version of the rule, the FTC seems to have taken stock of certain public concerns raised about the rule. For one, while the proposed rule required employers to proactively rescind existing non-competes that fell within the rule's reach, the final version has no formal rescission requirement and only obligates employers to provide notice that old non-competes no longer apply.
    • The final rule allows employers to maintain existing non-competes with senior executives. Still, employers will not be able to enter into new non-competes with senior executives.
    • The final rule's "sale-of-business" exception differs from the one originally formulated because it no longer includes a 25% ownership threshold. The FTC explained that it dropped the proposed requirement that an excepted non-compete bind only a "substantial" owner with at least 25% ownership stake after considering public comments which argued the threshold was too high because it failed to reflect the relatively low ownership interest held by many owners, members, and partners with significant goodwill in their business. See pp. 340-343 of the Rule.

[back to top]

  • How does the rule impact non-competes entered as part of an M&A transaction?
    • A "sale-of-business" exception allows a buyer in a bona fide sale of business transaction to enter into a non-compete with a seller, regardless of the size of the seller's interest in the target business.
  • Does the ban apply to non-competes in agreements between franchisors and franchisees?
    • The rule does not categorically ban franchisor/franchisee non-competes. The definition of a "worker" subject to the non-compete ban "includes a natural person who works for a franchisee or franchisor," but explicitly excludes "a franchisee in the context of a franchisee-franchisor relationship." § 910.1 of the Rule. However, the FTC notes that "franchisor/franchisee non-competes may in some cases present concerns under section 5 similar to the concerns presented by non-competes between employers and workers," and that those non-competes "remain subject to State common law and Federal and State antitrust laws, including section 5 of the FTC Act." See pp. 385-389.
  • How would the rule impact executives and executive compensation?
    • While existing non-competes with senior executives can stay in place, the rule would ban non-competes for executives; there is no carve-out for new non-competes with C-suite executives, and no salary threshold. This may also impact the calculation of "parachute payments" for tax purposes.
  • Does the rule ban garden leave?
    • Under the rule, garden leave may or may not be prohibited depending on how it is structured. The rule defines a "non-compete clause" as one that prevents the worker from seeking or accepting new employment "after the conclusion" of the current employment. Therefore, a garden leave provisions whereby the employee remains employed (i.e. with full salary and benefits) but is simply not allowed to access the business during the garden leave period should be permissible.

[back to top]

  • When will the rule go into effect?
    • On May 7, 2024, the FTC published the final rule in the Federal Register, which contains all government agencies’ rules and regulations. Based on this timeline, the final rule will go into effect and is enforceable on September 4, 2024 (i.e., 120 days following publication in the Federal Register).
    • Companies will have to be in compliance by that date. Still, enforcement could be further delayed or barred by legal challenge.
  • What legal challenges have been filed against the rule so far?
    • The first challenge to the rule was filed by tax service firm Ryan LLC in the Northern District of Texas on the day of the vote, April 23, 2024 (Case No. 24-cv-986).
    • The U.S. Chamber of Commerce filed its own suit the next day, April 24, 2024, in the Eastern District of Texas (Case No. 24-cv-148).  The Chamber of Commerce's challenge centers on four arguments: (i) The FTC lacks the authority to write regulations defining "unfair methods of competition;" (ii) Even if the FTC had such power, the rule would still be unlawful because non-competes are not categorically unlawful, as evidenced by non-competes' wide use and routine enforcement under state law; (iii) The Rule itself is impermissibly retroactive to the extent it undoes previously-executed agreements; and (iv) The Rule reflects an arbitrary and capricious exercise of the FTC's powers.
    • On May 1, 2024, plaintiff in the Ryan LLC matter filed a motion for stay of the effective date and for a preliminary injunction. The court set the briefing schedule on May 7 and indicated that it would issue a decision by July 3, 2024.
    • On May 9, the court in the Ryan LLC matter granted the Chamber of Commerce's motion to intervene. The Chamber of Commerce subsequently filed a motion to stay enforcement of the FTC's rule and for a preliminary injunction.
    • A third legal challenge was filed on April 25, 2024 in the Eastern District of Pennsylvania by ATS Tree Services, LLC, a tree service company located in Pennsylvania (Case No. 24-cv-1743).
    • We expect more challenges to follow.

[back to top]

Recent Wave of US FTC Enforcement Actions Against Worker Non-Compete Agreements

The FTC's initial proposed rule came within 24 hours of the FTC signaling its intention to achieve its anti-non-compete clause views through enforcement.

  • On January 4, 2023, the FTC announced that it had filed suits—for the first time—to stop companies from enforcing non-compete restrictions. The FTC's press release is here.
    • The suits involved three companies with non-competes for a range of workers, including low-wage workers, which lasted for one to two years. As a result of the suits, the companies were ordered not to enforce the non-competes, as well as put other remedies into place, such as providing notice for the next 10 years to employees that they may freely seek any job following their employment.
  • In these actions, the FTC sued under Section 5 of the FTC Act, which governs unfair methods of competition. The FTC argued that the non-competes harmed employees because they result in lower wages, lower salaries, and less favorable working conditions. The FTC also argued that the non-competes harmed new competitors in the glass food and beverage containers industry, noting that the non-competes would impede entry and expansion of new competitors in a concentrated market.
  • On March 15, 2023, the FTC ordered another glass container company to drop non-compete restrictions on more than 300 workers across a variety of positions, again arguing that the non-competes harmed workers and competition in the industry. The FTC's press release is here.
  • The FTC and Department of Labor (DOL) have signaled that more non-compete enforcement actions may be on the horizon.  On August 30, 2023, the FTC and DOL signed a Memorandum of Understanding that sets out coordination in investigations and sharing of information between the DOL and FTC related to labor and competition issues. The Memorandum of Understanding is here.
    • According to the FTC, "the MOU identifies areas of mutual interest for the two agencies: collusive behavior; the use of business models designed to evade legal accountability, such as the misclassification of employees; illegal claims and disclosures about earnings and costs associated with work; the imposition of one-sided and restrictive contract provisions, such as non-compete and training repayment agreement provisions; the extent and impact of labor market concentration; and the impact of algorithmic decision-making on workers" (emphasis added). The FTC's press release is here.

Both the rulemaking and enforcement actions are in line with the FTC's November 2022 policy statement announcing that the FTC would invoke Section 5 to challenge conduct beyond that covered by the Sherman Act.

[back to top]

White House and US Antitrust Enforcers' Commentary on Non-Competes

In the midst of these events, individual enforcers at both the FTC and the Antitrust Division of the Department of Justice, as well as at the White House, have been vocal about their perceptions and goals for the future of non-compete enforcement:

[back to top]

Changes at the State Level: New York and California

State legislatures have also shown a growing interest in new proposals to ban or limit non-compete agreements.

New York proposed non-compete ban. For example, on June 20, 2023, the New York State Legislature passed a bill that would have prohibited almost all new non-competes in New York and created a private right of action enabling workers to void their non-competes and recover up to $10,000 in liquidated damages, in addition to lost compensation, damages, and reasonable attorneys' fees and costs. Governor Hochul eventually vetoed the bill, calling for a carveout to the ban for higher-wage workers. The bill's sponsor in the State Senate has said that he will reintroduce the legislation in 2024.

California strengthens its non-compete ban. California's new non-compete laws went into effect on January 1, 2024, bolstering the state's existing protections against non-competes. Though most non-compete clauses have been void in California since 1872, California's newly enacted AB-1076 and SB-699 create additional bars to enforcing non-competes in the state. SB-699, signed into law in September 2023, expands the reach of California's non-compete ban to contracts signed outside the state and creates a new private right of action for workers to sue employers who enter into or attempt to enforce a non-compete. AB-1076, enacted just a month later, codifies California Supreme Court precedent which made including a non-compete clause in an employment contract or requiring an employee to enter a non-compete unlawful unless an exception applied. AB-1076 also requires that California employers notify employees who are subject to unlawful non-competes that their non-competes are void by February 14, 2024.

  • What are the key features of the California laws?
    • SB-699 makes most non-competes unenforceable in California, "regardless of where and when the contract was signed." Section 2(a). The law also prohibits employers and former employers from attempting to enforce a non-compete, even if "the employment was maintained outside of California." Section 2(b). The law could prevent out-of-state employers from enforcing non-competes against employees who leave to work at California companies.
    • Under SB-699, an employer that enters into a prohibited non-compete commits a civil violation that can be enforced through a new private right of action which enables a current, former, or prospective employee to sue for injunctive relief and actual damages as well as reasonable attorney's fees and costs. Section 2(e)(1)-(2).
    • AB-1076 codifies California Supreme Court precedent in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (Cal. 2008), which clarified that any non-compete that falls outside the scope of California's preexisting exceptions is void, regardless of how narrowly tailored the non-compete is. Section 1.
    • AB-1076 also provides that California employers must notify both current employees and former employees employed after January 1, 2022 who are subject to unlawful non-competes that their non-competes are void. Section 3(b)(1). Written notice must be provided to these employees by February 14, 2024, and failure to provide such notice constitutes an act of unfair competition subject to a $2,500 penalty per violation. Section 2(b)(2), 2(c).
  • Do the California laws apply to all non-competes?
    • No. California allows non-competes in the context of the sale of a business, the dissolution of a partnership, or upon the dissolution or termination of interests in a limited liability company, so those agreements will remain outside the scope of these laws. Cal. Bus. & Prof. Code Sections 16601, 16602, 16602.5.
  • How does the California law differ from the FTC's rule?
    • The FTC’s rule covers less non-competes than California's ban. The FTC's rule contains the above-described exception for existing non-competes imposed on senior executives, while California's ban has no similar exception. Additionally, though California's ban also exempts certain sale-of-business agreements, this exception under California law has a narrower scope and only allows non-competes against business owners who sell (i) the goodwill of a business, (ii) all of their ownership in a business entity; or (iii) all or substantially all of the assets of a business together with the goodwill of that business. Cal. Bus. & Prof. Code Section 16601.

[back to top]

UK Proposed Stricter Approach to Non-Competes

In a policy paper on "Smarter Regulation to Grow the Economy," the UK government has announced proposals to limit the duration of non-compete clauses in employment contracts to three months.

This proposal reflects the growing concern worldwide concerning the use of non-competes. As discussed above, earlier this year, the U.S. FTC took even more extreme action than the UK, by publishing a proposed rule to ban non-compete clauses completely.

  • What is the approach to non-competes in the UK?
    • There are currently no statutory restrictions on non-compete provisions in the UK.
    • Under case law, non-competes will only be enforceable if they are no wider than reasonably necessary to protect a legitimate interest (e.g. protection of confidential information or customer contacts) and are not contrary to the public interest.
    • The UK courts have in the past enforced up to 12 month non-competes in employment contracts in certain sectors, particularly in case of non-competes imposed on founders or senior management. In other contexts, including partnership agreements and shareholder agreements, non-competes that apply for a longer duration have been enforced by the UK courts.
  • What are the proposals?
    • The UK government proposes to limit the duration of post-termination non-compete clauses in employment contracts to three months.
    • The three month limit will only apply to non-competes in contracts of employment and the contracts of certain other workers who benefit from certain protections under UK employment law. The UK government does not propose to apply the limit to wider workplace contracts, such as partnership or shareholder agreements. This is on the basis that there are fundamental differences in the balance of bargaining power with these wider workplace contracts. Based on the consultation document, it appears that equity incentive documents, such as employee share option agreements, would be considered a wider workplace contract as well.
    • There are carve-outs. The proposal will not limit or interfere with the employer's use of:
      • non-solicitation clauses;
      • paid notice periods or gardening leave; or
      • confidentiality clauses.
    • The proposal also will not affect the restrictions on former UK public sector employees under the UK business appointment rules.
    • The proposal follows a consultation period between 4 December 2020 and 26 February 2021 that explored and ultimately rejected the following two alternatives:
      • the complete prohibition of post-termination non-compete clauses; and
      • making post-termination non-compete clauses permissible only when the employer provides compensation for the period of restraint.
    • The UK government estimates that there are around 5 million employees subject to non-compete clauses in Great Britain and that a typical duration is around 6 months.
    • Whilst recognising that non-compete clauses "can play an important role in protecting businesses who invest in their staff", the proposal claims that, "unnecessarily burdensome clauses have become a default part of too many employment contracts, including where they fulfil no purpose." The proposal states that non-compete clauses "can inhibit workers from looking for better paying roles, and limit the ability of businesses to compete and innovate".
    • The proposal's stated aims are to give "UK workers greater freedom to switch jobs, apply their skills elsewhere and even earn a pay rise." They also aim to "provide a boost to the wider UK economy, supporting employers to grow their businesses and increase productivity by widening the talent pool, and improving the quality of candidates they can hire."
  • Why no complete ban on non-competes?
    • In contrast to the US FTC's proposal, the UK government has ruled out a complete ban of non-competes. Following a review of "available evidence, research, and literature", the UK government considers that the risks and potential for unintended consequences could outweigh the potential benefits of a complete ban. While the UK government recognises that a complete ban could have "a positive effect on competition and innovation", it considers that "there is some evidence to suggest that in certain circumstances, non-compete clauses can act as a mechanism to align incentives between workers and employers, and enable investments."
  • What should employers do?
    • Employers should start to consider other ways they can protect their business interests once the proposed limit comes into force.
    • In the UK, the most robust way of protecting an employer's business interests in an employment contract of a senior employee who holds valuable trade secrets is a long notice period combined with an express garden leave clause. A 12 month notice period is fairly typical for a C-suite executive.
    • Where a long notice period is not appropriate or cannot be agreed, then employers may consider including non-competes in wider workplace contracts. In particular, if equity incentive documents will ultimately be considered a "wider workplace contract" under the final legislation, then granting an option or other equity interest which includes a carefully drafted (and longer) non-compete in its terms might well be a sensible and enforceable alternative.
  • What is the proposed timetable?
    • The proposal states that the UK government intends to legislate "when parliamentary time allows." There is currently no clarity as to whether, if legislation does pass in this area, it will apply retroactively to existing employment contracts and contracts with workers and if so, whether pre-existing non-competes that apply for longer than 3 months will only be enforceable for 3 months after termination, or whether such non-competes will be unenforceable and void in their entirety.

[back to top]

UK publishes research report on competition and market power in labor markets

On 25 January 2024, the UK's Competition and Markets Authority (the CMA) published a research report on competition and market power in labour markets.

What is the report on "Competition and market power in UK labor markets"?

  • The Report is the first "flagship" research study published by the CMA's Microeconomics Unit, which was recently established to conduct economic research focussed on issues of competition, innovation, and productivity to support growth in the UK economy. The Microeconomics Unit has been set up as an independent and open-access centre of microeconomic research expertise for the UK government as a whole, and so the Report is aimed not just to inform the CMA's work, but also to be of wider policy interest.
  • The Report examines employer market power and labor market concentration, the prevalence of restrictive covenants (including non-compete clauses), as well as changes in the labor market, including hybrid and flexible working and the gig economy, which features an increased amount of temporary positions and freelance work. The CMA is planning to use the findings to inform its current increasing scrutiny of potentially anti-competitive conduct in labor markets, as well as broader government and policy thinking.

What does the report say about non-compete clauses in UK employment contracts?

The Report finds evidence that post-termination non-compete clauses in employment contracts (preventing an employee from working at a competitor for a prescribed amount of time after they leave their current employer) are common in the UK.

According to the research:

  • Non-compete clauses impact around:
    • 26% of workers in the UK;
    • 40% of UK workers in information and communication technologies and professional and scientific services; and
    • 20% of UK workers in retail, education, and food services.
  • The most common duration of UK non-competes is 6 months, applied by 43% of employers who use non-competes. About 33% of employers who use non-competes include year-long clauses.

CMA chief executive Sarah Cardell questions specifically in her published speech (accompanying the Report) the high number of non-competes prevalent for the lowest-paid workers. She notes that, while non-competes are typically justified on the basis of enabling investment to develop workers (through training/sharing confidential information), "we might expect to see non-competes only in particular industries or groups of workers where this sort of investment is happening". The use of non-competes for rank and file workers at fast food chains throughout the U.S. has been a focus of enforcement actions by state enforcers and the U.S. DOJ especially since 2016.

What are the implications of the Report?

  • The Report's findings (specifically the findings that well-functioning labor markets benefit workers and the economy more generally) will bolster the CMA's determination to ensure that businesses do not restrict competition between them in labor markets, through for example no-poach and wage-fixing agreements.
  • Employee non-competes usually fall outside the scope of UK antitrust law, but are governed by employment law. The UK is currently planning to legislate to limit post-term non-competes to 3 months in the UK (as explained above). In her accompanying speech, Sarah Cardell states that the evidence in the Report "supports this direction of travel", and comments that "the widespread prevalence of non-competes across the economy could act as a barrier to job switching."
  • Highlighting the possible need for further education, it is interesting that the Report notes that 40 per cent of respondents to the "Business Insights and Conditions Survey", with 250+ employees, stated that they were "not sure" what types of restrictive covenant they use in their employment contracts.

[back to top]

White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

© 2024 White & Case LLP

Service areas