On August 20, 2024, a federal district court in Texas ruled that the Federal Trade Commission (FTC) cannot ban employers from requiring workers to sign non-compete agreements. In April 2024, the FTC voted to adopt the rule (the Non-Compete Clause Rule) that would ban non-compete agreements nationwide. The rule was supposed to take effect on September 4, 2024.

A federal lawsuit against the Non-Compete Clause Rule was filed in the U.S. District Court for the Northern District of Texas. In July 2024, the federal court issued a preliminary injunction specific to the plaintiff, Ryan LLC, a global tax services firm. However, the August 20, 2024 decision applies nationwide and effectively sets aside the Non-Compete Clause Rule.

The FTC will likely appeal the Texas court’s decision.

Summary of the Proposed Non-Compete Clause Rule

The rule, originally proposed in January 2023, provided that non-compete agreements were “an unfair method of competition.” Specifically, non-competes violate section 5 of the FTC Act because they tend to “impede rivals’ access to the restricted employees’ labor, harming workers, consumers, and competitive conditions.” The proposed rule would ban non-compete clauses in employment agreements, employment policies, garden leave agreements, and severance agreements.

The rule divided workers into two categories: non-senior executives and senior executives. For workers other than senior executives, “it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.” Had the rule gone into effect, employers would have been required to provide workers with existing non-competes notice that they are no longer enforceable

With respect to senior executives, “it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.” 

Existing non-competes could remain in place for senior executives because “this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives.”

Non-Compete Agreement Restrictions by State

Even though the nationwide Non-Compete Clause Rule will no longer take effect on September 4, 2024, some states have adopted their own non-compete laws, which remain unaffected by the recent ruling. 

As of the time of this writing, four states have complete bans on non-compete agreements: California, Minnesota, North Dakota, and Oklahoma. An additional nine states and D.C. have non-compete restrictions based on an employee's income level. 

What the Non-Compete Ruling Means for Employers

The Ryan LLC v. FTC ruling means that employers won’t need to make changes to their non-compete policies in the immediate future. State-specific laws will still control whether a non-compete clause is enforceable and allowed. After the recent ruling, FTC spokeswoman Victoria Graham announced, “[The FTC is] seriously considering a potential appeal, and today's decision does not prevent the FTC from addressing non-competes through case-by-case enforcement actions.”

Although there won’t be any sweeping changes in the near future, employers should carefully review their non-compete clauses to ensure they comply with applicable state laws. Regardless of whether the decision is appealed, the FTC will continue to examine individual non-compete agreements in response to agency complaints.

Non-Compete Clauses in Severance Agreements

At Onwards HR, we help companies conduct compliant and compassionate employee separations. Our severance package generator uses rules-based automation to create severance language specific to each individual employee. For example, during a mass layoff or reduction in force (RIF), employers can have peace of mind that impacted employees aren’t being asked to sign severance agreements that violate the laws of their particular state.

Our severance package technology evaluates for compliance with other employment laws, too, including the Department of Labor’s WARN Act, state mini-WARNs, and the Equal Employment Opportunity Commission’s Age Discrimination in Employment Act/Older Workers Benefit Protection Act. When these laws are triggered, our sophisticated rules engine automatically generates the legally required notices and waivers.

Although non-competes will remain as is for the foreseeable future, employers should conduct periodic reviews of separation-related documentation to ensure compliance with the ever-evolving legal landscape.