The Federal Trade Commission’s (FTC) recent rule banning noncompete agreements in most employment contexts, and rescinding most existing noncompetes, takes effect on September 4, 2024. While this sweeping decision will impact employees and employers in all sectors, learn more about the implications for healthcare noncompete clauses and how this may transform the industry.
How noncompete clauses are currently employed in healthcare
Noncompetes are written agreements that restrict employees from competing with their current employer for a set amount of time within a certain geographic area. In the healthcare industry, noncompetes are common for physician and practitioner employment agreements.
For decades, healthcare noncompete clauses have been viewed as a way for hospitals and health networks to ensure the continuity of their workforce and discourage restricted employees from leaving employment. Back in 2021, a PA House Bill proposed a ban on physician noncompetes, highlighting the alarming nationwide and particularly statewide shortage of healthcare practitioners. The bill didn’t pass.
Criticism and support for healthcare noncompete clauses
Proponents of the new FTC ruling argue that eliminating noncompetes will increase patients’ access to healthcare and foster a more competitive healthcare job market. However, there are others who criticize the ban and claim it could create an anti-competitive, unlevel playing field between for-profit and nonprofit healthcare entities, as well as threaten access to high-quality care for millions of patients.
If the new rule survives legal challenge, healthcare providers should consider how it will impact employee retention, and by extension, patient retention. Healthcare employers will need to consider other ways to strengthen retention of skilled employees, such as increasing incentives for prolonged work and investing more into employee relationships. Conversely, employees will be able to more freely transfer to new facilities or participate with competing facilities.
Exceptions to healthcare noncompete clauses
Notably, this new rule does not affect all individuals or healthcare organizations. As stated, existing noncompetes for Senior Executives are not rescinded under the new rule; however, future use of noncompetes for Senior Executives remains banned. A Senior Executive is limited to a policy making individual (i.e., President, CEO, or equivalent), who was paid more than $151,164 in 2023.
Additionally, the FTC’s elimination of noncompetes, generally, does not affect nonprofit organizations. A 503(c) tax-exempt status is not sufficient to exclude a healthcare organization from the new rule, as the FTC will review whether an organization is truly engaged in business only for charitable purposes and directs its proceeds to public, rather than private, interests.
Lastly, the new rule does not apply to non-competes entered into by a person pursuant to the sale of a business.
Monitoring the noncompete ban
While the new rule has already been subjected to legal challenge, the FTC has indicated that it will enforce the rule until it is expressly overturned. FLB’s healthcare and employment attorneys in Allentown, PA will continue to monitor the situation, providing guidance and advice to clients. Please contact our team if you have questions!
FLB Summer Associate Joshua Haney contributed to this blog
