By a 3-2 vote, the Federal Trade Commission (“FTC”) approved issuance of a final rule (the “Rule”) banning almost all non-compete agreements between companies and their workers, including employees and independent contractors.  The Rule, slated to go into effect 120 days after its publication in the Federal Register, deems entering into, attempting to enter into, or attempting to enforce employee non-competes as unfair methods of competition in violation of Section 5 of the FTC Act.

The Rule follows the FTC’s issuance of the proposed “Non-Compete Clause Rule” in January 2023. In its initial proposal, the FTC requested public comments on whether franchisor/franchisee non-competes should be prohibited as well. Ultimately, the FTC excluded franchisor/franchisee non-competes from the Rule’s ban. However, the Rule explicitly applies to franchisors’ and franchisees’ workers.

Despite concerns raised by many commenters, the Rule applies retroactively except with respect to “senior executives” (those who have both policy-making authority and annual compensation of at least $151,164). As such, employers (including franchisors and franchisees) will be required to provide all non-senior executive workers who are currently subject to non-compete restrictions with individualized notice that such restrictions are unenforceable. Notice must be provided by the effective date of the Rule. Employers will be prohibited from entering into non-competes with all workers, including senior executives, from and after the effective date of the Rule.

While the Rule is the latest regulatory effort to eliminate restrictive covenants in the employment context, state and federal legislatures as well as courts are giving non-competes greater scrutiny. For attendees of the IFA Legal Symposium, Cheng Cohen partner Antonia Scholz will discuss the current regulatory landscape of non-competes and how franchisors are adapting in Round #6, Session 3 –How to Protect the Franchise System in a World Without Enforceable Non-Competition Covenants.