On April 23, 2024, the Federal Trade Commission (“FTC”) announced its final ruling on the Non-Compete Clause Rule (“Final Rule”) to prohibit for-profit employers from enforcing existing non-compete agreements against their current and former workers and from entering into any future non-competes after the effective date of the Final Rule, which is 120 days after the date the Final Rule is published in the Federal Register (“Effective Date”). As of this date, the Final Rule has not yet been published in the Federal Register. As such, any non-compete which is currently enforceable in your state, will continue to be enforceable until the Effective Date. Additionally, as detailed in this article, if a court intervenes, the FTC may be enjoined from adopting this new restriction.
What types of employers are subject to the Final Rule?
For our clients in the health care industry, unless you are a non-profit, you’ll most likely be subject to the Final Rule. However, a business simply claiming tax-exempt status as a non-profit is not enough to fall outside of the FTC’s jurisdiction. The FTC also considers both the source and destination of a business’s income, such as whether the business is engaged for only charitable purposes and whether it derives profit for either itself or its members.
There was some question over the past year as to whether health care employers would be exempt. In fact, the FTC specifically addressed non-competes in the health care industry during the formal rulemaking period, and ultimately decided to decline exempting for-profit health care employers or the health care industry altogether from the Final Rule as was requested by many commentators representing health care organizations and industry trade associations.
What types of workers are subject to the Final Rule?
The FTC’s Final Rule has a broad reach across all types of workers, which includes any natural person who works or previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other state or federal laws including the following:
- Employees
- Independent contractors
- Externs
- Interns
- Volunteers
- Apprentices
- Sole proprietors who provide services to others
- Workers who work for franchisees or franchisors (excluding franchisees in the context of a franchisee-franchisor relationship)
Is there an exception?
Yes. The Final Rule does have an exception for “senior executives” with existing non-competes. Even though the FTC will allow employers to continue enforcing existing non-competes against senior executives even after the Final Rule’s Effective Date, they will be prohibited from entering into new non-competes.
To be subject to the senior executive exception, one of the following three criteria must be met by a worker in a policy-making position, such as an officer or a person with policy-making authority:
Criteria A:
- If the worker was employed in a policy-making position during the full year of the preceding year, the worker must have earned a total annual compensation of at least $151,164.00 in the preceding year.
Criteria B:
- If the worker was employed in a policy-making position during only a part of the preceding year, the worker must have earned a total annual compensation of at least $151,164.00 when annualized in the preceding year.
- These workers include senior executives who were hired, promoted or demoted, or discharged via termination or resignation, during the preceding year.
Criteria C:
- If a former worker resigned or was terminated prior to the preceding year and is currently subject to a non-compete, the worker must have earned a total annual compensation of at least $151,164.00 when annualized in the preceding year prior to their departure.
- These workers include senior executives who departed from employment more than one year before the Effective Date.
The calculation of a worker’s total annual compensation includes base salaries, commissions, nondiscretionary bonuses, and other nondiscretionary compensation; however, it excludes board, lodging, meals, transportation, payments for medical insurance and life insurance, contributions to retirement plans, and the costs of other similar fringe benefits.
Would physicians fall under the “senior executive” exception?
In order to determine whether a physician would fall under the senior executive exception, you would first check whether they meet the total annual compensation thresholds in any of the three criteria above.
If the physician meets the total annual compensation threshold, the next step is to determine whether the physician was in a policy-making position. Such criteria could be met through an official officer position: president, vice president, CEO, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any other natural person who routinely performs corresponding functions.
A physician without an official officer title could still be in a policy-making position if they have final authority over policy decisions that control significant aspects of a business or common enterprise. This type of final authority, however, excludes authority limited to merely advising or exerting influence over policy decisions, and further excludes final authority that affects only a subsidiary or affiliate of a common enterprise.
What is the controversy with the Final Rule?
The FTC proposed the Non-Compete Clause Rule on January 19, 2023, which was followed by a public comment period during which over 26,000 comments were submitted, including comments from thousands of health care workers both opposing and supporting a non-compete ban in the health care industry.
Since the Final Rule was issued on April 23, 2024, there has been considerable opposition. In fact, just a day after the issuance of the Final Rule, the US Chamber of Commerce, together with other business groups, filed a lawsuit against the FTC and Chair Lina Khan in a Texas federal court in an attempt to overturn the Final Rule.
Some of the arguments against the Final Rule, including the arguments made by the Chamber of Commerce in its lawsuit, contend that the FTC lacks the authority to make rules and regulations that prohibit what it determines as “unfair methods of competition”, and that not all non-competes constitute “unfair methods of competition” and their validity is a question that should be addressed under state law.
The FTC asserts that Congress had carefully structured the FTC with jurisdiction over “unfair methods of competition” and “unfair or deceptive acts or practices” “in or affecting commerce,” and as such, the FTC has authority to both (1) determine whether a certain activity falls under one or both of those categories; and (2) write legislative rules regarding such an activity. The FTC argues that there are many historical examples of the FTC exercising such authority. For example, the Cigarette Rule, which was later supplanted by Congress’ Cigarette Labeling and Advertising Act, declared that failing to disclose certain health warnings in cigarette advertising and packaging as an “unfair method of competition” and “unfair or deceptive act or practice”. Among many other examples, the FTC also cites to the FTC’s Unavailability Rule that declared the same for grocery stores offering products for sale at a stated price if those products were not going to be readily available to consumers.
As for the Final Rule, the FTC claims that it has enforcement authority over non-competes because they are in or affecting commerce. In other words, the FTC claims that states are interconnected with respect to non-competes as one state’s non-compete law could impact the competitive conditions in another state. The FTC postures that the Final Rule actually solves for the confusion caused by choice of law provisions in employment agreements because it would provide a uniform standard across all states.
What should you do?
At this point, the outcome of the Final Rule is uncertain as it is likely to be tied up in litigation challenging its lawfulness, and it is highly questionable as to whether it will ever go into effect. As such, employers should not rush to make any changes or notices regarding their existing non-competes. Instead, you should closely monitor the developments relating to the Final Rule and its lawsuits until the challenges are resolved. In the meantime, for any new employment agreements going forward, it remains important to tailor your non-competes according to your state’s law.
Contact ByrdAdatto for Guidance on Employment Agreements
At ByrdAdatto we are working hard to ensure our clients are up to date with the latest regulation and rule changes to maintain compliance. If you have any questions about this alert or non-compete agreements, please contact ByrdAdatto at info@byrdadatto.com.
