On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to issue a proposed final rule (“Final Rule”) that would prevent most employers from enforcing non-competes against their former employees or contractors.
Previously, on January 5, 2023, the FTC had issued a notice of proposed rulemaking (“NPRM”). Following issuance of the NPRM, the FTC accepted comment for 90 days. This Final Rule was then issued in response to the over 26,000 comments received by the FTC.
The Final Rule will become effective 120 days after the FTC publishes the Final Rule in the Federal Register.
Scope of the Final Rule; Exception for Senior Executives
Under the Final Rule, entering into non-compete clauses with any type of worker, including senior executives, on or after the Final Rule’s effective date is considered unfair competition and is a violation of the FTC Act. The Final Rule does, however, contain one primary exception; after the effective date, existing non-compete agreements can remain in force for “senior executives.”
A senior executive is defined as an individual who (1) makes more than $151,164 and (2) holds a “policy making position”. A “policy-making position” is a “president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority”. Note that both elements (1) and (2) must be met for a worker to be considered a senior executive; therefore, the vast majority of physician employees would not meet the definition of senior executive, and the Final Rule would prohibit subjecting them to non-competes, even if entered into before the adoption of the Final Rule.
Note on Providing Notice to Employees who are Party to Non-Competes
Previously, the NPRM had required each employer to provide notice to its existing employees that their non-competes are no longer enforceable. This requirement has been removed in the Final Rule.
Applicability to Non-Profit Entities
The Final Rule contains a prolonged discussion regarding whether the FTC’s powers reach non-profit entities, such as hospitals. While the FTC looks to both “the source of the income, i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income, i.e., to whether either the corporation or its members derive a profit”. The FTC also noted that merely “claiming tax-exempt status in tax filings is not dispositive”. Notwithstanding this, it is likely that the Final Rule will not apply to employees of most non-profit hospitals.
Legal Challenges
The Final Rule will likely be challenged in court, and potentially stayed pending the outcome of the case, meaning that enforcement may be delayed for months or years. The challenges will most likely be based upon the argument that the FTC lacks rulemaking authority, and/or that it exceeded its rulemaking authority with this wide-reaching rule.
Next Steps
Frier Levitt is monitoring the situation and will continue to provide updates regarding the Final Rule as more information becomes available. We will also be releasing further analysis of the Final Rule’s anticipated impact on specific healthcare industry stakeholders over the coming days so please continue to check here and our social media pages for updated content related to the Final Rule.
Please feel free to contact us with any questions.
