Legal update
US FTC ban on non-compete provisions
In an attempt to increase innovation, foster new business formation, and protect workers’ rights and freedom of movement, the United States Federal Trade Commission (the FTC) have (for the most part) banned the use of non-compete clauses by employers in the US with effect from 4 September 2024 (the Ban). It should be noted the Ban is currently subject to legal challenge.
Scope of the Ban
The Ban applies to all entities that employ or engage “workers” in the US (but it could in theory apply to entities who are based outside of the US that employ or engage workers who are subject to non-competes that purport to restrict work in the US).
The Ban will prevent such entities from entering into, or attempting to enforce, any new non-compete provision. The Ban will also apply retrospectively to existing non-competes for any person that is not a “senior executive”, i.e. those who are in a policy making role and earn more than US$151,164 per annum.
The Ban will not apply to garden leave provisions (i.e., a provision enabling an employer to require an employee to remain away from the workplace and cease duties whilst still employed and in receipt of pay and benefits) and will not impact on any other provisions in a contract that seek to protect an entity’s confidential information.
The Ban does not prohibit the use of other post-termination restrictions, such as non-solicitation agreements or non-disclosure agreements, unless such an agreement is “so broad or onerous that it has the same functional effect” as a non-compete restriction.
Key takeaways
Whilst the Ban is currently subject to legal challenge, entities caught by the Ban should be mindful to comply with the new rules should the Ban take effect on 4 September 2024. We recommend taking steps now to assess whether existing restrictions in employment contracts that continue to have effect after termination of employment (e.g., non-solicitation covenants and restrictions on the use of confidential information or intellectual property) provide adequate protection. Given the short window from now until 3 September 2024 (following which the Ban becomes effective), entities could consider asking senior executives to enter into new or updated non-compete provisions.
A thought on the UK
In January 2024, the UK Competition and Markets Authority reported that non-compete provisions are prevalent in the UK, including widespread use for low-wage employees and use in certain industries (e.g., retail) where there is limited justification for such provisions. Following a period of consultation, the former Conservative Government announced in May 2024 its intention to legislate to limit non-competes under English law to a maximum of three-months “when parliamentary time allows”. Despite a number of new reforms proposed under the new Labour Government, there is no reference to post-termination restrictions or the intention to introduce legislation to provide for a three-month time limit.
With the direction of travel, now would be a prudent time for all employers to review post-termination restrictions both with key employees and in template contracts to better understand their enforceability.
“a term or condition of employment that prohibits a worker from … (1) seeking or accepting work in the US with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the US after the conclusion of the employment that includes the term or condition.”
(FTC definition of non-compete)