FTC Issues Final Rule Banning Noncompete Clauses

The Federal Trade Commission (FTC) voted on April 23 to issue a final rulethat would prohibit employers from including provisions in contracts with workers that prevent them from leaving to work for a competitor or starting a competing business after their employment (referred to as "noncompetes"). The law defines workers as including employees, independent contractors, apprentices, externs, interns, and volunteers. For senior executives (who make at least $151,164 annually), existing noncompetes can remain in force; for all other employees, existing noncompetes are not enforceable. While the rule generally would not apply to employers that are nonprofit entities, thecommission stresses that both judicial decisions and commission precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the commission's jurisdiction. The commission applies a two-part test to determine whether a corporation is organized for profit and, thus, bound by the final rule. The final rule effective date will be 120 days after it is published in the Federal Register.

The U.S. Chamber of Commerce and other business groups sued the FTC on April 24 in the Eastern District of Texas Court, arguing that the agency lacks the authority to issue the rule and asking the court to overturn it.