FTC Final Rule Bans Non-Compete Agreements


(Last Updated On: May 14, 2024)

Non-Compete Agreement

Employees and employers alike in Massachusetts should know about the new Federal Trade Commission (FTC) final rule that bans non-compete agreements or clauses across the country. The new rule will impact most employees and employers in most workplaces, and it will be a rule that prohibits new non-compete agreements in addition to being a rule that will invalidate many existing non-compete agreements in Natick and Boston workplaces. The rule is set to take effect in the near future. Yet it is also important to know that a lawsuit filed by business groups has already argued that the FTC does “not have authority to issue rules that define unlawful methods of competition,” according to The New York Times. Those business groups are seeking to invalidate the ban on non-compete agreements. 

Whether you are an employee or an employer in Massachusetts, what do you need to know about the new FTC rule, its implications, and the possible outcome of the newly filed lawsuit? Our Boston employment law attorneys can provide you with more information. 

Understanding Massachusetts Law Concerning Non-Compete Agreements 

Before we discuss the new FTC rule and its implications for employees and employers in Massachusetts, it is essential to understand how non-compete agreements work and when they have been permitted and deemed enforceable in Massachusetts. According to Thomson Reuters, a non-compete agreement — which can also be called a non-compete clause, a non-competition agreement or clause, or a covenant not to compete — is a contract between an employer and employee that “prohibits the employee from competing with the business directly or indirectly for a specific duration of time after their employment has ended.”  

These agreements typically limit an employee’s ability to work for a competitor or to start their own business in competition with the employer, and limit an employee’s ability to create or market competing products or services. Usually, a non-compete agreement will have a specific geographic scope and a specific time limit. Prior to the new FTC rule, Massachusetts law already banned non-compete agreements for a wide range of healthcare providers, social workers, employees in the broadcasting industry, and lawyers. In professions where Massachusetts permits non-compete agreements, they have generally been enforceable as long as they are considered to be “reasonable based on all the circumstances.” However, once the new FTC rule takes effect, even “reasonable” non-compete agreements will be banned and unenforceable in most circumstances. 

Learning More About the New FTC Final Rule 

According to a press release from the FTC, the new rule means that “existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date.” The only exception is for existing non-compete agreements for senior executives, who currently account for less than 0.75% of all workers.  

In addition to invalidating existing non-compete agreements (except for senior executives), employers will also be “banned from entering into or attempting to enforce any new non-competes, even if they involve senior workers.” In addition, the new FTC rule also requires employers to provide employees with notice that existing non-competes will not be enforceable. 

The final rule will take effect 120 days after it is published in the Federal Register.  

Lawsuit Seeking to Invalidate the New FTC Rules 

In finalizing the new rule, the FTC underscored its reasoning: 

  • Non-compete agreements can prevent employees from finding new jobs better suited to their needs; 
  • Non-compete agreements can limit innovation and prevent new business formations and startups; and 
  • Non-compete agreements can exploit workers. 

The FTC emphasized that, once the new rule takes effect, there will be anywhere from 17,000 to 29,000 new patents each year, more than 8,500 new businesses formed, and higher earnings for workers. About 30 million workers are currently impacted by non-compete agreements (nearly 20 percent of the American workforce), and nearly all of those workers will have more business-related freedoms when the rule takes effect. Yet as we noted, business groups are suing and arguing that the FTC does not have the authority to issue this final rule. According to the article in the Times, the FTC does not “have the power to issue a ban” of this type, and “even if it did, a categorical ban on such agreements [is not] lawful.” 

It will likely be some time before legal issues surrounding the FTC’s final rule are determined, but in the meantime, employers and employers should expect the rule to ban new non-compete agreements and invalidate most existing ones. 

Contact a Massachusetts Employment Law Attorney for Advice 

Whether you are an employee or an employer, it is important to understand how the FTC rule is likely to impact you. If you have any questions about your rights or responsibilities, you should seek advice from a Boston employment law attorney today. Contact Rodman Employment Law for more information about how we can assist you.  

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