Following a 90-day public comment period generating more than 26,000 comments, the Federal Trade Commission (FTC) voted Tuesday, April 23, 2024, to adopt a final rule banning non-compete agreements for most American workers. The rule is set to take effect 120 days from the date it is published in the Federal Register and could have sweeping implications in the health care industry. Legal challenges to the rule are mounting, with business groups led by the U.S. Chamber of Commerce filing a complaint April 24, 2024, in the Federal District Court for the Northern District of Texas challenging the FTC’s rule and seeking to block its implementation.
Non-compete agreements are particularly common in the health care industry, with a considerable portion of the health care work force bound by non-compete provisions. The rule could change the health care playing field, allowing for greater employment mobility for health care professionals. The FTC argues that the rule will reduce healthcare costs and allow health care professionals to switch employers without leaving their communities. Many trade groups—including the American Hospital Association—disagree, arguing that non-compete agreements are necessary for workforce recruitment and retention.
The final rule will forbid most forfeiture-for-competition clauses, which are a common feature of deferred compensation plans for executives and physicians. These clauses may not be express non-compete clauses, but the rule forbids arrangements that have the effect of a non-compete by prohibiting workers from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment. New deferred compensation plans for executives may not contain forfeiture-for-competition clauses, and existing forfeiture-for-competition clauses in arrangements with non-executives must be rescinded. For those professionals who qualify as “executives” under the final rule, forfeiture-for-competition clauses in force prior to the rule’s effective date may remain in force.
The FTC has also reserved the right to evaluate whether entities claiming non-profit status for tax purposes are sufficiently non-profit for purposes of the rule. In effect, while the FTC does not have jurisdiction over non-profit entities, it argues that many entities that claim non-profit status for tax purposes may actually fall under its jurisdiction, to the extent that it can determine that such entities are in fact profit-making enterprises. To determine whether an entity claiming tax-exempt non-profit status is a profit-making enterprise, the FTC will consider both the source of an entity’s income, determining whether the entity is actually engaged in business for charitable purposes, and whether the entity’s profits flow to recognized public, rather than private, interests. Considering the FTC’s position, businesses organized as non-profits for tax purposes should consult with legal counsel to determine whether they might be impacted by the new rule.
Notably, the rule’s ban on non-compete agreements does not apply to agreements entered into by a person pursuant to a bona fide sale of a business entity. As an example, for physicians who have sold or are planning to sell their incorporated practices, non-compete agreements concerning the sold practice likely remain enforceable under federal law. However, because the rule requires the sale of a business entity, including by way of asset sale, this exception does not apply to the sale of a sole proprietorship or assets of a business that has not been incorporated.
While legal challenges may result in changes to the rule, long delays to the rule’s effective date, or the rule’s implementation being blocked completely, states remain free to introduce similar non-compete restrictions. Currently, four states ban all non-compete agreements, and twelve states prohibit non-compete agreements for physicians. Given the increased pressure and discourse surrounding non-compete agreements, it is likely that states will continue to implement new restrictions, and it remains possible that Congress will enact legislation banning non-compete agreements nationwide.
Health care businesses and professionals are encouraged to consult with legal counsel to discuss their options and strategies for addressing the new rule and creative retention strategies, including practice structuring options, physician and executive contracting, and possible incentive options. Varnum’s Health Care Practice Team stands ready to assist businesses with any questions or concerns they may have. Varnum will continue to monitor the ongoing and impending legal challenges to the new rule.
For additional information, please see our advisory New FTC Rule Bans Most Non-Compete Agreements.