FTC’s New Rule Banning Non-Competes

The FTC has determined that non-competes are an unfair method of competition and thus a violation of the FTC Act.

In April 2024, the Federal Trade Commission (FTC) issued a final rule banning non-competes nationwide. The FTC has determined that non-competes are an unfair method of competition and thus a violation of the FTC Act.

The ban prohibits organizations from entering into new non-compete agreements or inserting non-compete clauses in new contracts. The rule applies to all persons working for an organization, whether paid or unpaid, and without regard to how the worker is classified under any other state or federal law.

With the exception of non-competes for senior executives, existing non-competes also become unenforceable. For senior executives, existing non-competes may remain in effect, however, new non-competes are prohibited.

A “senior executive” is a worker in a policy-making position who received total compensation of at least $151,164 in the preceding year. A policy-making position includes the organization’s President, Chief Executive Officer, or equivalent, and any other person who has substantial authority within the organization.

Finally, organizations will be required to notify workers currently bound to a non-compete that the non-compete will not be enforced against them in the future. The organization must notify its workers before the ban goes into effect. The FTC provides model notices, which can be found here.

The FTC maintains jurisdiction over entities organized to carry on business for profit or for the profit of its members. Accordingly, generally, the FTC does not have jurisdiction over nonprofits. This means that most nonprofits will not be affected by the new rule and may continue to enter into and enforce non-competes.

However, the FTC has stated that nonprofits determined to be operated for a profit or for the profit of its members fall under the FTC’s jurisdiction and are subject to the ban on non-competes. The FTC specifically mentions healthcare organizations and hospitals as examples of nonprofits that may be under the purview of the ban.

Further, the FTC posits that tax-exempt status does not, itself, shield a nonprofit from its jurisdiction. Instead, the FTC takes the position that even if an entity claims tax-exempt status, it may still fall under the FTC’s jurisdiction if it operates for a profit, for the profit of its members, or has ceded effective control to a for-profit partner. In other words, if the nonprofit is found to be operating in contravention of foundational tax-exemption principles, such as private benefit/inurement and operating for a profit, the nonprofit will be considered under the FTC’s jurisdiction.

The new rule goes into effect 120 days after it is published in the Federal Register. As of the date of this blog, the rule has not been published.

Several organizations have expressed their intent to challenge the ban. Almost immediately after its announcement, the U.S. Chamber of Commerce sued the FTC to block the rule. The ban will likely be put on hold until all lawsuits are resolved.

Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form

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