As proposed, the Federal Trade Commission’s proposed rule to prohibit employers from using non-compete clauses in employment agreements would have sweeping impact on health care practices and hospitals employing restrictive covenants in clinician contracts.

Under the proposed rule, hospitals and practices that invest a lot of time and money into getting a clinician up and running are at risk of seeing that clinician not only walk out the door, but cross the street and joining, or setting up, a competing business.

The proposed rule is sure to generate significant discussion and is not yet finalized and in effect. It is currently subject to public comment, due by March 6, 2023. Employers throughout various industries will undoubtedly have ranging opinions on the imposition, fairness and effectiveness of non-compete clauses. There is certain to be intense lobbying around the issue. Direct legal challenges to the rule, and the FTC’s authority to implement it, are probable as well.

Rule Prohibits Employers From Utilizing Non-compete Clauses In Employment Agreements

The rule would “provide that it is an unfair method of competition for an employer to enter into, or attempt to enter into, a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”

Both independent contractors and employees are covered under the coined term “worker” for the purposes of the proposed rule.

Importantly, the proposed rule seeks to supersede all existing and contrary state laws that otherwise allow non-compete clauses. The details of the rule are contained in the FTC’s Notice of Proposed Rules.

The proposed rule would retroactively apply such that employers would be required to rescind existing non-compete clauses, and actively inform current and former workers that their existing non-compete agreements are no longer effective.

Perhaps most notable is the proposed rule’s broad spanning definition of “non-compete clause.” The proposed rule defines a “non-compete clause” as any “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The FTC also clarified whether a contractual provision should be regarded as a non-compete clause would depend, not on the name of the provision, but how the provision functions. In other words, any agreement or contractual clause which has the effect of a non-compete clause would be subject to the ban.

Does Not Apply To Non-Disclosure Or Non-Solicitation Agreements

Despite the limitation on non-compete clauses, the FTC clarified the proposed ban would generally not include other types of restrictive employment covenants, such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements. The FTC reasoned these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. However, as discussed above, if these agreements essentially acted as a limit on the worker’s ability to perform work for another entity, they may still remain subject to the proposed rule’s ban on non-compete clauses.

The FTC’s proposed rule has been anticipated for at least a year, when President Biden tasked the FTC to initiate rulemaking on non-compete clauses in an Executive Order on July 9, 2021.

Employers with questions as to the proposed rule’s impact on their operations—and whether to submit formal comments to the FTC — should review the proposed rule’s impact and consult with their employment counsel.