Non-Compete Agreements After the FTC Rule Changes: Where Things Actually Stand

Non-compete agreements for employees have been in legal and regulatory flux since the FTC announced a proposed rule to ban most of them in January 2023 and finalized a rule in April 2024. That rule was blocked by federal courts before it took effect. What followed has been a complicated combination of ongoing litigation, state-level legislative activity, and continued enforcement uncertainty.

Here's where things actually stand in mid-2026, and what small business owners need to know about protecting their legitimate interests while operating in a shifting legal environment.

The FTC Rule: What Happened

The Federal Trade Commission finalized a rule in April 2024 that would have banned non-compete agreements for most workers, with very limited exceptions. The rule was challenged in federal court almost immediately. In August 2024, the U.S. District Court for the Northern District of Texas struck down the rule as exceeding the FTC's statutory authority, and a federal appeals court affirmed that ruling.

As of mid-2026: the FTC's non-compete ban is not in effect. The underlying litigation has continued through various stages of federal court review, and the current administration's FTC has taken a different posture on enforcement. The rule that would have changed everything nationally is currently enjoined and may never take effect as originally written.

The State-Level Reality Is the Controlling Reality

Non-compete enforceability has always been primarily a state law question. The FTC action created national momentum for state legislatures to move independently, and many did.

States that have enacted significant non-compete restrictions since 2020:

• Minnesota (2023): Banned non-compete agreements for employees and independent contractors, effective January 1, 2023. One of the most comprehensive state-level bans.
• California, North Dakota, Oklahoma: Have long prohibited employee non-competes, with California's prohibition being one of the most stringent in the country (extended and reinforced by recent legislation).
• Illinois (2022): Banned non-competes for workers earning below $75,000/year; restricted others.
• Colorado, Washington, Oregon: Significant restrictions including salary thresholds, notice requirements, and geographic/duration limitations.

Many other states have tightened enforcement standards without outright banning. The trend at the state level is clearly in the direction of greater restriction, even without the federal ban.

What this means for your business: Non-compete enforceability depends on where your employees are located. An agreement that is fully enforceable in Texas may be completely void for your Minnesota employee doing the same job. Multi-state businesses with remote employees face particularly complex situations.

What Non-Competes Can and Can't Do Even Where They're Enforceable

In states that still allow non-competes, courts apply a reasonableness analysis. The general framework:

Legitimate business interest: The restriction must protect something real — trade secrets, confidential information, customer relationships developed at the employer's expense. A non-compete that prevents a janitor from working for a competitor serves no legitimate business interest and won't be enforced.

Reasonable scope: The restriction must be limited to what's necessary to protect that interest. Nationwide restrictions for an employee who only served a regional market are typically overbroad. Restrictions on an industry where the employee had no access to competitive information are overbroad.

Reasonable duration: Courts in most states are skeptical of non-competes exceeding one to two years. Longer restrictions are regularly narrowed or voided.

Courts have authority in most states to "blue-pencil" (narrow) overbroad non-competes to a reasonable scope. This sounds reassuring but isn't — litigation over what's reasonable is expensive, and the employee operates under uncertainty while the case proceeds.

The Better Tools for Most Small Businesses

For many small business owners, the combination of a well-drafted non-solicitation agreement and a comprehensive confidentiality/trade secrets agreement protects the actual interests at stake more reliably than a non-compete.

Non-solicitation agreements prohibit a departing employee from soliciting your customers or employees for a defined period (typically one to two years). These are more narrowly targeted than non-competes, are generally better tolerated by courts across all states, and protect the specific injury — losing customers and team members to a defecting employee — rather than broadly restricting employment.

Confidentiality agreements protect the specific information — client lists, pricing, business strategies, proprietary processes — that you've legitimately invested in developing. Combined with trade secrets law (the Defend Trade Secrets Act federally, and state trade secrets statutes), a solid confidentiality agreement can provide strong protection for competitive information without the enforceability challenges of a non-compete.

IP assignment clauses ensure that work product, inventions, and intellectual property developed in the course of employment belong to the business, not to the departing employee.

This combination — non-solicitation + confidentiality + IP assignment — is often more durable, more enforceable across jurisdictions, and more tailored to your actual interests than a broad non-compete.

The Sale of Business Exception

Most states that have restricted or banned employee non-competes maintain an exception for non-competes ancillary to the sale of a business. If you're selling your company and the buyer wants a non-compete from you (as the seller), to protect the goodwill they're paying for, that agreement is generally treated differently from an employee non-compete.

Seller non-competes are generally enforceable and reasonable if tied to the actual scope of the business being sold, typically for 3 to 5 years. If you're buying a business and negotiating a seller non-compete, or selling and being asked to sign one, this is a distinct legal context from the employee non-compete environment.

What You Should Do Now

If your business currently uses non-compete agreements for employees:

1. Have current agreements reviewed by an employment attorney who tracks state law. Pay particular attention to any employees in states with strong restrictions.
2. For any new hires in restrictive states, consider whether the non-compete actually adds protection or creates a false sense of security. Replace or supplement with non-solicitation and confidentiality agreements that will hold up.
3. If you're in a multi-state employment situation, have a policy that identifies which agreement applies based on the employee's primary work location.
4. Don't assume the agreements you've been using for years are still effective. The landscape has changed materially.

This article is educational and does not constitute legal advice. Employment law, including non-compete enforceability, varies significantly by state and is actively changing. Consult a qualified employment attorney for guidance specific to your situation and jurisdiction.