FTC Issues Final Rule Banning Many Non-compete Agreements

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On April 23, 2024, the Federal Trade Commission (FTC) adopted a new rule that would significantly limit the enforceability and validity of non-compete agreements on workers. This new rule will become effective 120 days after the publication of the final rule by the FTC. Although of interest to any business owner, healthcare providers and individuals in the healthcare industry should pay close attention to this law and its developments and have their agreements reviewed.

Under the final “Noncompete Rule,” the FTC bans all new non-compete clauses with all workers, including senior executives after the effective date of the final rule. For existing non-compete terms that were in place prior to the effective date, the final rule makes distinctions between senior executives and other workers. For senior executives, existing non-compete terms can remain in force, whereas existing non-compete provisions for workers who are not senior executives within the meaning of the rule are no longer enforceable after the effective date of the final rule. The final rule defines the term “senior executive” as a worker earning more than $151,164 annually who are in a “policy-making position.”

It is noteworthy that the definition of a non-compete clause is all encompassing in the final rule and includes any term or condition that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (1) seeking or accepting work in the United States with a different person where such work would begin after the worker’s current engagement ends; (2) operating a business in the United States after the conclusion of the worker’s current engagement.

The final rule, although recognizing the distinction between an employee and independent contractor, dispenses with it for purposes of the rule and deems both employees and independent contractors as “contractors” for purposes of application of the new final rule and intentionally uses the term “worker” for the bulk of its language.

To further its position on non-compete clauses, the FTC is requiring employers to notify any person with whom they have a non-compete clause in effect that it will not be and cannot be enforced, and provides specific rules and guidance for that process.

No rule is absolute and there are exceptions to the FTC’s final rule, including situations where the non-compete term is entered as part of the sale of a business, is related to a cause of action that accrued prior to the effective date. Additionally, further guidance will likely need to be issued to align the more stringent requirements of this final rule with recent changes to state law surrounding non-compete clauses in agreements.

The final rule does leave some questions open for interpretation and we expect highly that it will be challenged on constitutional and administrative law grounds in the coming months. Please reach out to an attorney at Helsell Fetterman LLP if you have any questions on application, timing, and compliance of this new rule.

Please contact Tyler Jones if you have any questions on this new FTC development and check back to this page for updates as new information becomes available.

About the Authors

Tyler Jones

Tyler’s practice consists of advising businesses and individuals on state and federal tax and business planning issues, such as business formation, risk management, corporate governance, and business succession planning. He also advises medical and health care professionals on purchasing and selling medical practices, real estate leases and purchase agreements, and employment and non-compete agreements.

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