US FTC ban on ‘non-compete’ clauses – UK businesses operating in the US need to take note

Posted: 03/07/2024

With the aim of increasing innovation and protecting workers’ freedom to change jobs, the use of non-compete clauses by employers across the US will in almost all cases be banned with effect from 4 September 2024, under a new rule adopted by the Federal Trade Commission (FTC).  

The FTC defines a non-compete clause as ‘a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person… or (2) operating a business in the United States…’

The rule will apply widely to ‘workers’ in the US. A worker includes an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service. A worker also includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

The FTC has confirmed that other restrictions, such as confidentiality obligations, non-solicitation, or non-dealing covenants, may also be caught under their definition of a non-compete if the clause basically functions as one. In addition, employee incentive arrangements linked to obligations on an employee not to compete could also be in scope, where the individual is financially penalised for doing so. In simple terms, the rule means that employers will no longer be able to prevent US employees from working for a competitor or starting up their own business in competition after the end of their employment.

The ‘non-compete’ ban will not apply to non-competes entered into with sellers in certain sale-of-business agreements, provided that such arrangements are made in good faith.  Further, there is an exception for ‘senior executives’, so that non-competes applicable to senior executives entered into before 4 September 2024 will remain enforceable. However, ‘senior executives’ are defined as workers earning more than $151,164 annually and who are in ‘policy-making positions’. The policy-making position requirement to be a ‘senior executive’ significantly reduces its application.

Finally, the non-compete ban will not apply to entities outside of the FTC’s jurisdiction, such as non-profit entities, certain common carriers, certain domestic and foreign air carriers, and businesses subject to the Packers and Stockyards Act of 1921.

The ban has international application. The FTC has confirmed that it ‘may apply to overseas employers if the non-compete purports to restrict work or starting a business in the US and the reviewing court applies US law’. So, the ‘non-compete’ ban will not apply to non-compete clauses if they restrict only work or the operation of a business outside the United States.

The ruling is currently being challenged and there may be further developments before 4 September 2024. If the rule comes into force, as currently drafted, UK businesses operating in the US will need to look to alternative workarounds to protect their US business interests.  

In the meantime, it is recommended that affected UK employers note the deadline for compliance and gather a list of potentially impacted current and former US employees with relevant contact information. Additionally, as this is likely to evolve, monitoring the progress of the legal challenges is crucial.

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