New FTC Final Rule Bans Most Non-Compete Clauses in Employer Agreements

By: Elizabeth Coleman

On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a Final Rule banning non-compete clauses in employment agreements. Non-compete clauses place limitations on workers pursuing certain employment opportunities after their employment contract ends and are generally used to protect investments in employees and safeguard proprietary information. These clauses often include financial penalties or forfeitures if violated. Typically, courts review non-compete clauses on an individual basis to strike a balance between unfair restrictions on the employee and the interest that employers have in retaining labor and preventing the release of information once an employee leaves. The FTC’s Final Rule issues a blanket ban on these clauses with few exceptions based on its position that these clauses constitute an “unfair method of competition” in violation of the FTC Act. The FTC has suggested that the removal of these clauses from contracts will protect the freedom of workers to change jobs, increase innovation, and foster new business formation.

Who Does the New FTC Non-Compete Rule Apply To?

The Final Rule prohibits non-compete clauses in employment agreements with employees and retroactively invalidates all pre-existing non-compete clauses for workers. The Rule applies to all employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors providing services. However, it does not apply to existing agreements with executive level employees who earn more than $151,164 annually and who are in “policymaking” positions. New agreements with such policymaking executives will be subject to the Rule once effective.

There are two scenarios in which non-compete clauses are still permissible moving forward. And these exceptions are especially relevant to healthcare entities. First, the FTC does not have authority to regulate not-for-profit entities, which includes many healthcare organizations. The FTC has cautioned, however, that the question of whether an entity is a “bona fide” non-profit depends on more than just its tax-exempt status. The FTC expressed its position that non-profit entities organized primarily for the profit of their members are within FTC jurisdiction and covered by this Rule. Second, the Rule allows a non-compete clause to be enforced if it is entered into pursuant to a bona fide sale of: 1) a business entity, 2) the person’s ownership interest in a business entity, or 3) all or substantially all of a business entity’s operating assets. This exception therefore allows an entity to include and enforce a non-compete clause in an agreement with a departing provider who sells his or her ownership shares in a medical practice, for example.

Read More: What you need to know about the Corporate Transparency Act 2024

Industries That Could See the Largest Impact of the New FTC Rule

This Final Rule could have significant implications for hospitals and entities in the healthcare field. Specifically, the American Hospital Association issued a letter in opposition to the Rule on behalf of its nearly 5,000 members, noting that the Rule stands to exacerbate the health care labor scarcity dilemma and negatively impact hospitals who are forced to release highly-skilled, highly-compensated individuals from existing contracts with non-compete clauses. Specifically, healthcare entities make significant investments to attract and retain top providers and employees, and non-compete clauses can be an effective tool to protect that investment and dissuade employees from leaving the company for a nearby competitor. While non-disclosure agreements and trade secret laws can protect proprietary information, there are fewer avenues to protect the time and money invested in recruiting qualified employees. However, many individual providers lauded the rule, noting that the change frees up health care providers to pursue different employment opportunities within their community and will improve patient access and the quality of care provided at facilities.

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When Does the New FTC Rule Go into Effect?

The Final Rule takes effect 120 days after publication (early September 2024). However, many entities have expressed their intent to challenge the Rule, including the United State Chamber of Commerce, which has already filed a federal suit in Texas seeking an injunction and postponement of the Rule’s effective date. At least two other suits have been filed at this time.

Until further legal action granting an injunction or otherwise delaying enforcement occurs, employers should expect the Rule to take effect in September and review existing contracts to identify those which will remain enforceable following the effective date. Employers should also update relevant company policies, handbooks, and employment contracts that contain these provisions. Employers must also prepare to notify all former and current employees subject to the pre-existing non-competes (other than those senior executive policymakers) that the non-compete provisions are void and unenforceable. The FTC provides model language that employers can utilize to provide this notice. Existing legal actions to enforce non-compete clauses are permitted to continue if filed prior to the effective date of the Final Rule.

Need Help with Your Existing Policies? — Reach Out to Goodman Allen Donnelly

Please contact Goodman Allen Donnelly with questions pertaining to this new Rule and its impact on your operations. Our attorneys can work with you to modify existing policies and to identify potential alternatives to protect your interests in a way that does not violate the FTC’s Final Rule or other bans on non-compete clauses.