The FTC Just Made Your Non-Compete Agreements Obsolete

A pen on a paper reading Non-Compete Agreement Cancelled.

By Jennifer Mitchell

The Federal Trade Commission (FTC) recently announced a new rule banning non-compete agreements for most employees. This move holds significant implications for small business owners in Washington State and nationwide if you consider that an estimated 30 million Americans are currently under a non-compete. Here's a closer look at what this means:

What is the rule? 

Non-competes are now prohibited for employees earning less than $151,164 annually, which is the Department of Labor's 2025 highly compensated employee threshold. For those earning higher salaries, non-compete agreements are still valid, but only for senior executives with the authority to make policies at the company. But once the rule goes into effect, new agreements can't be formed or enforced, regardless of salary or responsibility.

What is the FTC hoping to achieve?

FTC Chair Lina M. Khan included the following reasoning when the rule was announced: non-compete agreements suppress wages, stifle innovation, and limit new business creation. The new rule is expected to raise worker earnings by $524 annually on average and reduce healthcare costs by an estimated $194 billion in the next 10 years. The FTC also believes the rule will boost innovation and lead to 17,000 to 29,000 more patents a year over the next decade. This goal is to give Americans the freedom to pursue new opportunities, start businesses, and bring new ideas to the market.

There are exceptions, right?

Yes, but really only one key exception. Non-compete clauses tied to the owner selling a business will remain valid, but only for the owner(s), not for any employees. This impacts buy-sell agreements and can influence the overall value of a business. For instance, a business sale might now appear less attractive to potential buyers, knowing that key employees can leave immediately and start a competing company.

What does this mean for business owners?

Going forward, business owners cannot ask employees to enter into non-compete agreements or enforce existing ones unless they're with a select few senior executives. Additionally, you will be required to notify past and present employees that their non-competes are unenforceable within 120 days of the law's enactment, expected around August 21, 2024. This notification must be in writing, either digitally or on paper. While non-competes will be nearly obsolete, non-solicitation, non-recruitment, and non-disclosure agreements are still allowed, provided they aren’t really non-competes in disguise.

Is this legal?

Federal and state lawsuits challenging the FTC's authority to implement this rule are ongoing, potentially altering its application or timing. The U.S. Chamber of Commerce and various business advocacy groups, as well as myriad individual business owners, are actively involved in this developing legal battle.

What do I need to do now?

There's no immediate need to notify current or former employees, particularly given the legal challenges around the rule. However, it is a good idea to compile a list of existing non-competes and gather current contact information for former employees. You should also revisit your non-solicitation, non-recruitment, non-servicing, and non-disclosure clauses, as they might face new scrutiny. And if your business has any trade secrets, intellectual property, or other information you want to protect, review your policies and procedures around this information, limit access to sensitive information, and consider beefing up your confidentiality agreements as well.

For more information, you can read the FTC's statement here. We will keep an eye on any new developments and update you as we can.