On Apr. 23, the Federal Trade Commission (FTC) issued a final rule that prohibits making or enforcing non-compete provisions for the majority of employees. The rule is expected to be effective on or around Aug. 21, 2024. On the effective date of the final rule, most existing non-competes will no longer be enforceable.

The final rule, which is expected to impact approximately 30 million employees across the United States, will not apply to non-compete agreements for senior executives (i.e., workers earning more than $151,164 annually who are in a “policy-making position”) that are already in existence. No new non-compete agreements will be permitted. The FTC reasoned that the exception for senior executives is provided for because “this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives.”

With respect to a worker other than a senior executive, the final rule provides that it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause[1]. The final rule will not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity, nor will the rule affect trade secret laws or non-disclosure agreements, which may serve as alternatives to non-competes.

Those in the healthcare industry should note that because the FTC determined it only has jurisdiction over for-profit companies, the non-compete ban will not apply to nonprofit companies (this likely means many of the hospitals in the United States and some of the country’s biggest health insurers).

Employers will be required to notify all employees (current and former) with non-compete provisions that these provisions are no longer enforceable.

The FTC estimates that the ban on non-competes will lead to a growth of 2.7 percent in new business formation, with approximately 8,500 new businesses estimated to be formed each year. The FTC expects U.S. worker earnings to increase by $400-$488 billion over the next 10 years, with an estimated earnings rise of $524 per year, on average.

Lastly, the FTC anticipates healthcare costs to be reduced by approximately $74-$194 billion over the next 10 years as a result of the non-compete ban. In the FTC’s view, the relative purpose of this final rule is to address conduct that it deems harmful to fair competition. However, legal challenges to the ruling have already started in Texas and the U.S. Chamber of Commerce has already issued a statement against this rule.

There is more anticipated to come. One of the challenges with this ruling is whether the FTC has the authority to make such a ruling. The rule may be final, but the story isn’t over. Stay tuned for more.

If you have any questions regarding the final rule, compliance, or other matters, please contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.

About Bill Kalogredis, Esq. and Sonal Parekh, Esq.

Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory, and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Kalogredis can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq. is an Associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a Pharmacist by education and training. Parekh can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

Learn more at Lamb McErlane PC. Lamb McErlane PC is a full-service regional law firm based in West Chester with a reputation for delivering the highest caliber of legal service in an environment focused on personal attention and results.

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[1] A non-compete clause is defined as a term or condition of employment 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 conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition. The term or condition may be a contractual term, workplace policy, or otherwise stated, whether written or oral.

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This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.