(with very limited exceptions). The final rule will not go into effect until 120 days after its publication in the Federal Register, which took place on May 7, and numerous legal challenges appear to be on the horizon.
The principal components of the rule are as follows:
- After the effective date, most non-compete agreements (which prevent departing employees from signing with a new employer for a defined period within a specific geographic area) are banned nationwide.
- The rule exempts certain “senior executives,” ie individuals who earn more than $151,164 annually and serve in policy-making positions.
- There is another major exception for non-competes connected with a sale of a business.
- While not explicitly stated, the rule arguably exempts non-profits, tax-exempt hospitals, and other tax-exempt entities.
- Employers must provide verbal and written notice to employees regarding existing agreements, which would be voided under the rule.
The final rule is the latest skirmish in an ongoing, years-long debate. Twelve states have already put non-compete bans in place, according to a recent paper, and they may serve as a harbinger of things to come should the federal ban go into effect. Each state rule varies in its specifics as states respond to local market conditions. While some states ban all non-compete agreements outright, others limit them based on variables, such as income and employment circumstances. Of course, should the federal ban take effect, it will supersede whatever rules the individual states have in place.
Dr. Joseph S. Eastern
In drafting the rule, the FTC reasoned that non-compete clauses constitute restraint of trade, and eliminating them could potentially increase worker earnings as well as lower health care costs by billions of dollars. In its statements on the proposed ban, the FTC claimed that it could lower health spending across the board by almost $150 billion per year and return $300 million to workers each year in earnings. The agency cited a large body of research that non-competes make it harder for workers to move between jobs and can raise prices for goods and services, while suppressing wages for workers and inhibiting the creation of new businesses.
Most physicians affected by non-compete agreements heavily favor the new rule, because it would give them more control over their careers and expand their practice and income opportunities. It would allow them to get a new job with a competing organization, bucking a long-standing trend that hospitals and health care systems have heavily relied on to keep staff in place.
The rule would, however, keep in place “non-solicitation” rules that many health care organizations have put in place. That means that if a physician leaves an employer, he or she cannot reach out to former patients and colleagues to bring them along or invite them to join him or her at the new employment venue.
Within that clause, however, the FTC has specified that if such non-solicitation agreement has the “equivalent effect” of a non-compete, the agency would deem it such. That means, even if that rule stands, it could be contested and may be interpreted as violating the non-compete provision. So, there is value in reading all the fine print should the rule move forward.
Physicians in independent practices who employ physician assistants and nurse practitioners have expressed concerns that their expensively trained employees might be tempted to accept a nearby, higher-paying position. The “non-solicitation” clause would theoretically prevent them from taking patients and co-workers with them — unless it were successfully contested. Many questions remain.
Further complicating the non-compete ban issue is how it might impact nonprofit institutions. Most hospitals structured as nonprofits would theoretically be exempt from the rule, although it is not specifically stated in the rule itself, because the FTC Act gives the Commission jurisdiction over for-profit companies only. This would obviously create an unfair advantage for nonprofits, who could continue writing non-compete clauses with impunity.
All of these questions may be moot, of course, because a number of powerful entities with deep pockets have lined up in opposition to the rule. Some of them have even questioned the FTC’s authority to pass the rule at all, on the grounds that Section 5 of the FTC Act does not give it the authority to police labor markets. A lawsuit has already been filed by the US Chamber of Commerce. Other large groups in opposition are the American Medical Group Association, the American Hospital Association, and numerous large hospital and healthcare networks.
Only time will tell whether this issue will be regulated on a national level or remain the purview of each individual state.
Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.