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Prohibition on Non-Compete Clauses Applies to Equity-Based and Compensation-Based Agreements

July 1, 2024


The Rule prohibits an employer from entering into, attempting to enter into, or attempting to enforce a non-compete agreement with an employee or independent contractor at any point after the effective date.

The Non-Compete Rule also bans non-competition covenants in almost every type of agreement between a company and its employees and independent contractors. It is important to note that the Rule also applies to various employee benefits and executive compensation agreements. For example, the Non-Compete Rule would bar post-employment competition restrictions contained within equity compensation agreements, operating agreements, phantom stock awards, deferred compensation agreements and other executive compensation agreements, with very few exceptions.

The Rule will allow enforcement of non-competes between a company and a senior executive (an individual making at least $151,164 annually who works in a policy-making role) that were entered into prior to the effective date. It also allows for non-competition restrictions in purchase agreements and various employment agreements executed in connection with the bona fide sale of a business. Employers may also enforce non-competes that were entered into and breached prior to the effective date. Non-disclosure agreements, customer non-solicitation agreements, and employee non-solicit agreements are not banned under the Rule unless they have the effect of preventing future employment.

Understanding that the Non-Compete Rule applies to all types of employment agreements, including compensation agreements and equity-based agreements, employers should be sure to conduct a review of any and all compensation or equity-based agreements for restrictive language on post-employment competition. This includes any language that effectively requires forfeiture or repayment of compensation if an employee or independent contractor leaves to work for a competitor.

For each employee or independent contractor subject to a non-compete restriction, the FTC Rule requires employers to provide a separate and clear notice before September 4, 2024 that the non-compete provision will not be enforced. Such notice may be given by hand-delivery, mail, email or text message.

For questions regarding the FTC’s new rule prohibiting non-compete agreements, please reach out to a Kerr Russell employment attorney.