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New FTC Rule Bans Noncompete Agreements For Workers

New FTC Rule Bans Noncompete Agreements for Workers

On May 7, the Federal Trade Commission (FTC) announced a Final Rule that bans noncompete agreements for all workers, including employees, independent contractors, and volunteers. This new regulation, set to take effect on September 4, will significantly impact worker agreements as employers reassess the enforceability of noncompete clauses in current and future contracts. Unless successfully challenged in court, this Rule will soon be in force.

Understanding the New Prohibition on Noncompetes

Starting September 4, the FTC’s Rule will make all new noncompete agreements unenforceable and invalidate most existing ones. A noncompete agreement is a contract in which an employee agrees not to compete with their employer for a specified period, often within a certain geographic area. These agreements can restrict workers from seeking or accepting employment in their field.

The Rule differentiates between “senior executives” and other employees for existing noncompetes. Noncompete agreements with senior executives will remain enforceable, while those with non-senior executives will become unenforceable on September 4. Employers must notify non-senior executives that their noncompete clauses are void. Additionally, any new noncompetes for senior executives entered into after the effective date will be unenforceable.

The Rule also scrutinizes other restrictive covenants, such as confidentiality and non-solicitation clauses. While these are not explicitly banned, they could be subject to the Rule if they functionally act as noncompetes, restraining workers from pursuing other business opportunities. All restrictive covenants remain subject to the general prohibition on unfair competition under Section 5 of the Federal Trade Commission Act (FTCA).

Impact on Health Care Workers

Compensation Threshold:
Many healthcare workers may meet the senior executive exception’s compensation requirement due to market trends.

Policy-Making Position:
A senior executive must have final decision-making authority. For single physician practices, a CEO typically meets this criterion. However, in larger healthcare organizations, determining senior executive status can be complex. The FTC provides guidelines, suggesting that individuals making policy decisions for an entire enterprise likely qualify as senior executives, whereas those at the subsidiary level may not.

Employers must carefully assess their organizational structures to determine which employees qualify as senior executives, especially in large healthcare systems.

Pending Legal Challenges

The Rule faces legal challenges, with the first lawsuit filed by Ryan, LLC, and other entities, including the U.S. Chamber of Commerce. They argue that the FTC overstepped its authority and that the Rule is arbitrary and capricious. A court ruling on a preliminary injunction and a motion to stay the Rule’s effective date is expected by July 3.

Action Steps for Health Care Organizations

Healthcare organizations should review their employment agreements for restrictive covenants:

  • Existing Employment Agreements:
    Determine if employees qualify as senior executives. Amend agreements for non-senior executives if necessary, and ensure other restrictive covenants do not function as noncompetes.
  • Pre-September 4 Agreements:
    Review job descriptions and employment agreements to ensure compliance. Include covenants with compliance and reformation provisions if the Rule is successfully challenged.
  • Post-September 4 Agreements:
    Track new agreements to ensure they comply with the Rule. Noncompetes will be void if executed after the effective date, provided the Rule stands.

Key Takeaways

Healthcare organizations will face administrative challenges in implementing the Rule. Employers should:

  • Assess and update employee handbooks, policies, and training materials.
  • Review and amend employment agreements to ensure compliance.
  • Work with legal and HR departments to develop new agreement templates.

Employers should start the review process now but wait for the legal challenges to resolve before making significant changes. The Rule’s effective date is still months away, allowing time for careful planning and compliance.