Earlier this year, the Federal Trade Commission (FTC) approved a final rule that invalidates most post-engagement non-compete covenants in all agreements. This rule prohibits use and enforcement of non-compete covenants and requires employers to notify workers, current and past, of changes imposed by the rule. The rule is set to take effect on September 4, 2024 barring the issuance of a last-minute applicable injunction. The implementation of this rule brings profound consequences for the health care industry as non-compete covenants have long been used by health care organizations to retain key talent and safeguard proprietary information. In light of the final rule, health care organizations must evaluate their agreements and related practices to guarantee compliance.
The first step in assessing the implications of the final rule is to determine what constitutes a post-engagement non-compete covenant. Under the final rule, a non-compete covenant is a term or condition of employment that prohibits a worker from or penalizes a worker after engagement for (i) seeking or accepting work in the United States with a different person or entity or (ii) operating a business in the United States. It does not, at least for now, apply to customary non-solicitation and confidentiality covenants. Further, it does not invalidate non-compete covenants that restrict a worker’s ability to compete during engagement.
Next, it is important to consider who is affected by the final rule. The final rule impacts all employers (by commentary, anyone that hires or contracts with workers) regardless of their size or industry. Pursuant to the final rule, non-compete covenants with “workers” are invalid and unenforceable. While each health care organization is structured differently and may not have traditional employees or independent contractors, the final rule still may apply. Under the final rule, “worker” is broadly defined as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker's title or the worker's status….” and includes both employees and contractors.
An exception provided is for non-compete covenants that predate the effective date of the final rule with “senior executives” in a “policy-making position” that made more than $151,124 during the preceding fiscal year. The final rule states that policy-making positions are ones that have final authority to make policy decisions that control significant aspects of an entire business or common enterprise. Examples of senior executives in a policy-making position include an organization’s president or chief executive officer. The compensation threshold is annualized for workers terminated during the preceding year.
Not only does the final rule invalidate employers’ post-engagement non-compete covenants with workers, it places an onerous time-sensitive burden on employers to give notice to current and former employees that their non-competes are unenforceable. If an employer has covered workers with non-compete covenants in agreements, including surviving covenants from terminated agreements, the rule requires employers to provide written notice to current and former workers bound by such covenants by September 4, 2024. The notice to the worker must identify his or her previous or current employer who entered into the non-compete covenant and give clear and conspicuous notice that the non-compete covenant cannot legally be enforced against the worker. The notice must be delivered by hand to the worker, by mail at the worker’s last known address, by email to an email address belonging to the worker, or by text message at a mobile number belonging to the worker. A model notice is available here.
Given the sizable impact this final rule will have on employers, and their ability to protect their proprietary information, such as client lists and pricing strategies, it is essential for employers to look to the future and consider how best to protect their organizations. Health care organizations can protect themselves by implementing carefully curated confidentiality agreements and non-solicitation agreements protecting the most imperative functions of their organizations.
In conclusion, the FTC’s final rule banning non-compete agreements will have a material impact on the health care industry. Health care employers should immediately review their agreements to determine what non-compete provisions are subject to the final rule, provide notice to the impacted workers, and revise their form agreements to remove invalid non-compete provisions.
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