Elimination of Noncompete Agreements - FTC Final Rule

Published in Government Relations on May 06, 2024

By Craig Douglas, Vice President of Payer and Member Relations, VGM Government Relations

A 570-page final rule released by the FTC on April 23 will effectively put an end to the use of noncompete agreements between employers and employees. The final rule stems from President Biden’s executive order that tasked the FTC with creating rules which promote more fair competition in the marketplace and prevent the unfair use of noncompete agreements. The final rule is scheduled for publication in the Federal Register on May 7, 2024, and will go into effect 120 days from publication (September 4, 2024), barring the results of any legal challenges to the rule. 

Noncompete agreements have been used for several hundred years by employers to prevent current employees from either leaving their current employer and going to work for a competitor, or from starting their own business that would compete with their current employer. Noncompete agreements are prevalent in many industries, and the healthcare industry is no exception. They typically include a set time frame (1-3 years is common) and a distance radius within which an employee is prevented from going to work for a competing business. These agreements often included clauses which:

• Prevent workers from taking a new job
• Prevent current employees from starting a new business
• Force workers to stay in a job they want to leave
• Force workers to switch to a lower-paying job or industry
• Force workers to relocate to somewhere outside of the restrictions of their noncompete
• Force workers to leave the workforce entirely
• Force workers or companies to endure expensive litigation

In their final rule, the FTC essentially removes most employer-to-employee noncompete agreements from the marketplace, a move that aims to:

• Promote competition
• Lower prices (primarily due to more competition in the marketplace)
• Foster innovation/new ideas
• Increase wages
• Promote better workplace culture (doing more to make employees WANT to stay vs. FORCING them to stay)
• Create more new businesses

Some key highlights of the FTC’s final rule include:

• Existing noncompetes for the vast majority of workers will no longer be enforceable.
• Existing noncompetes for “senior executives” (defined as workers who earn above $151,164 annually AND are in policy-making positions) can remain in force, but employers are banned from entering into or attempting to enforce any new noncompete agreements, even if they involve senior executives (less than 1% of the workforce).
• Employers will be required to give notice to workers who are not “senior executives” that they will not be enforcing any of the existing noncompete agreements.
• Trade secret laws and NDAs remain enforceable to protect against current employees leaving the company and sharing proprietary and sensitive information about the current employer.
• Sample language that will help employers comply with the requirement that they notify current employees of the changes to enforcement of existing noncompete agreements.

Employer Considerations

Based on the language of the final rule, employers are certainly able to hire new employees and have those new employees work in whatever capacity that fits them best right away without having to worry about whether the employee has, or is violating, a noncompete agreement. Employers may also want to consider:

• Reviewing their hiring and retention strategies
• Revising existing employment contracts with current employees 
• Educating employees about employer and employee rights under the new law
• Seeking legal guidance regarding potential legal challenges
• Looking into other methods of protecting their “secret sauce” or proprietary information 
  • NDAs or other types of confidentiality agreements
  • Trade secret protections

Employee Considerations

As written and released, the FTC’s final rule gives employees, if they so choose, more freedom to pursue new career opportunities in the marketplace without fear of legal restrictions. Employees can confidently navigate this new regulatory landscape and continue to pursue their professional goals, and a career and company that best suits them, by staying informed as this new rule moves forward.

Legal Challenges to This Final Rule

Legal challenges will likely arise from employers, entire industries, or even individual states. Historically, the existence and/or enforceability of noncompete agreements has been left up for states to decide. Currently, 47 states allow noncompete agreements (Oklahoma, California, North Dakota, and Washington D.C. have banned noncompete agreements), and several other states have certain scenarios where they are either allowed or disallowed. States with employer-friendly policies that have historically favored the use of such agreements or have laws that govern their use, and states with strong business interests, like Texas, are likely to push back against federal intervention in this area. Shortly after the final rule was released, the U.S. Chamber of Commerce filed a lawsuit stating that the FTC lacks the authority to issue a blanket federal policy like this. Many others agree this topic should be left for states to decide.

This final rule applies not only to traditional employees, but also to independent contractors and anyone else who works for an employer, whether that person is a paid employee or not. 

Implications for the HME Industry

The implications of this final rule will be far-reaching for employers in many industries, and the healthcare industry, and more specifically our DMEPOS industry, is no exception. It could impact any position within any company, but in my opinion, the largest impact will be for the licensed or credentialed staff; ATPs, RNs, PTs, OTs, RTs, CPOs, C. Peds, etc. Many of these positions have been tough to fill and keep throughout the pandemic, but the removal of noncompete agreements from the equation could lead to bidding wars for these highly-coveted personnel positions.

One segment of our industry that will not be impacted or changed much due to the final rule is the merger and acquisition segment. The final rule includes an exception regarding the sale of a business that will continue to allow noncompete agreements to be executed with a person who is selling a business entity or dissolving all of that person’s ownership stake in a business entity, as long as the sale is a “bona fide sale.” The FTC defines a bona fide sale to be a sale that:

• is made in good faith 
• is not made to evade the final rule
• is between two independent parties at arm’s length, where the seller has a reasonable opportunity to negotiate the terms of the sale

VGM will continue to monitor this topic and will issue further communications regarding any changes in the enforceability, timeline, or anything else related to this ban of noncompete agreements. If you have questions or need additional information, please reach out to craig.douglas@vgm.com or alan.morris@vgm.com.

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