This is a tectonic shift that will benefit American entrepreneurs and workers, and ultimately American consumers.
A non-compete agreement is a contract whereby a person agrees not to work for a competing business or start a similar business for a certain period after leaving their current job. Some corporations argue that they are necessary to protect their business, but they are often used cynically across broad swathes of a company’s workforce, limiting an employees’ ability to seek employment in a specific industry or geographical area, indirectly locking them in.
Non-competes erode one of the great strengths of the free market: the free movement of labor. They blunt competition, a price paid by the consumer. They also stifle entrepreneurship.
So what’s happened today…
The Federal Trade Commission published its final version of a rule prohibiting the enforcement of non-competes, having first issued a draft for comment in early 2023. When the final rule comes into effect:
❎ employers will be prohibited from trying to put in place NEW non-competes with employees at any level of the business
❎ all existing non-competes with employees (other than senior employees) will no longer be enforceable
✅ existing non-competes with senior employees (who represent less than 0.75% of workers) can, however, remain in force.
Businesses have (and will retain) other ways to protect legitimate business interests including non-disclosure agreements and protection under trade secrets laws. And, of course, more enlightened employers will protect their commercial interests by incentivizing employees to stay!
Importantly, the enforceability non-competes will be preserved in business acquisitions. The FTC’s rule does not apply to non-competition agreements made by an individual during the legitimate sale of their ownership stake in a business entity or the sale of most or all of a business’s operating assets.
We expect the rule to come into force in about four months’ time. Disappointingly, the US Chamber of Commerce has vowed to challenge the rule in court, perhaps as early as tomorrow (04.24.25). Others will likely do the same. These groups are, however, swimming against an outgoing tide: 25,000 of the 26,000 comments that the FTC received on the draft rule were in favor of the ban!
Read the full article by the Federal Trade Commission here
Have questions about non-competes in M&A transactions? Reach out today, we know M&A!
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