Member Article

On 23 April 2024 the U.S.A.’s Federal Trade Commission (FTC) issued a final rule banning non-compete clauses in employee contracts. The rule will take effect six months following formal publication.¹

The scope of the rule is an absolute and immediate prohibition of non-compete clauses, with the obligation on employers to serve notice on employees informing them they are no longer bound by the clause. The one exemption from the prohibition is non-compete clauses in existing contracts, but not contracts entered after the rule takes effect, for senior executives².

The rule only affects employees working in the U.S.A. However, there may be knock-on effects globally for three reasons.

First, the rule is applicable to any worker (which is broadly defined) that is accepting work in the United States. This could apply to a non-US citizen to be employed in the United States³.

Second, as regards their US employees, the FTC recommends companies review their contractual provisions for alternatives to non-competes that are designed to protect a company’s investments and IP rights. Trade secrets laws and non-disclosure agreements (NDAs) remain valid. If changes are to be made as a result of that review, this might require changes to these clauses for employees outside the U.S.A due to a company’s policies on best practice, common standards or non-discrimination.

Third, non-compete clauses are already under scrutiny in the UK and elsewhere. For example, the UK’s competition regulator, the Competition and Markets Authority (CMA), published a report on 25 January 2024⁴, identifying the high prevalence of non-competes (c.26% of all employee contracts, rising to 40% in some sectors). The CMA’s Chief Executive, Sarah Cardell, commented that the law ‘may need updating’. In May 2023 the UK government announced it would be introducing legislation to limit the length of non-compete restrictions⁵. At the EU level, the European Commission has a focus on non-poaching agreements and non-solicitation clauses, there being at least one active competition case where such clauses are the heart of the matter. It has been commented that there is an ongoing conversation in the EU regarding the potential exploitation of market power by employers through non-compete clauses⁶.

It may be noted that while government action might lead to mandatory changes to existing contracts, typically legislators give companies a period within which to make amendments. (In this regard the FTC’s six months ‘heads-up’ is towards the shorter end). However, action by the competition authorities or courts would, in principle, be actionable immediately upon the decision or ruling being made. Consequently, companies may wish to undertake a global policy review and amend new employee contracts, and potentially existing ones, taking the time now to undertake that review and check the changes are consistent with local laws, union agreements et al.

 

¹As at the date of this commentary the rule had not appeared in the Federal Register, which denotes formal publication.
²Defined as those earning more than $151,164 annually and who are in policy-making positions.
³Final Rule, §910.1.
⁴CMA, Competition and market power in UK labour markets, 25 January 2024, Report no. 1, see here.
⁵UK Department for Business & Trade, Non-Compete Clauses, Response to the Government consultation on measures to reform post-termination non-compete clauses in contracts of employment, 12 May 2023, see here.
⁶EURACTIV, Non-compete clauses for workers: Will the EU follow the US lead?, 6 February 2023, see here. 

 

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