A federal ban on nearly all employee non-compete agreements (NCAs) was approved by the Federal Trade Commission (FTC) on April 23. The rule is on schedule to go into effect at the end of August.
The ban on NCAs has been in the works for nearly three years. FTC chair Lina Khan zeroed in on giving employees the flexibility to leave a job and work in the same field — potentially for a competing company — early in her term.
The non-compete ban is arguably the most substantial and wide-ranging regulation to be issued by the FTC in its history. Not all commissioners were on board — the final vote to end employers’ ability to restrict worker movement was approved by a 3-2 vote. One commissioner said he didn’t think the FTC was permitted to issue substantial rules in the absence of Congress mandating it.
Here’s a rundown of what the NCA prohibition calls for; how the ban would affect healthcare; and how state laws that limit NCAs will impact the likelihood of the FTC ban surviving legal challenges.
Non-Compete Ban Leaves Some Executive Contracts Intact
The final rule bans new NCAs for all employees, including senior executives, after it goes into effect in late August (the reg wasn’t published in the Federal Register as of April 25). The FTC’s reasoning is that NCAs are “an unfair method of competition” and a violation of section 5 of the FTC Act of 1914.
Nearly 20% of American workers are currently bound by some type of NCA. Restrictions aren’t just in place for high-skill or director-level occupations. Ground-level employees such as hairstylists and janitors are asked to sign NCAs in order to work for certain companies.
The FTC carved out an exception for senior-level executives after pressure from Wall Street and industry groups. Existing NCAs for senior-level execs will remain legally binding per the FTC. A senior-level exec as defined by the FTC in its rule is someone who earns more than $151,164 annually and is involved in company policy-making.
Keep in mind: Companies will be unable to make a senior-level exec sign an NCA after the ban goes into effect.
The FTC estimates the benefits to workers and the economy include:
- a 2.7% increase (approximately 8,500) new businesses created annually
- an average of 17,000-29,000 more patents per year
- the average worker earning an extra $524 in annual pay, and
- a reduction in physician spending somewhere between $74 billion to $194 billion over the next decade.
Speaking of Physicians …
For-profit hospitals are liable to take a hit from the rule — well over a third of physicians are restricted by NCAs, according to the American Medical Association (AMA).
“[NCAs] can be especially problematic for residents, fellows and young physicians by limiting their opportunities for career advancement and restricting their ability to provide care in economically or socially marginalized communities,” says the AMA. Removing NCAs will help “improve patient access, enhance the availability of specialist coverage in a community and reduce health inequities by allowing physicians to work for multiple hospitals.”
Non-profit hospitals and health care facilities are exempt from the rule. The FTC lacks jurisdiction over non-profits.
Non-Compete Ban Hasn’t Hurt Silicon Valley Companies
The day after the FTC voted to promulgate the NCA ban, a lawsuit was filed questioning the constitutionality of the rule. Attorneys could face an uphill battle taking this tactic considering that NCAs are difficult or impossible to enforce in several states:
- Leading the pack (and providing some impetus for the FTC) is California which doesn’t allow NCAs. Silicon Valley firms were still able to innovate and make fortunes despite star performers being able to quit and go to work a competitor at any time.
- Oklahoma and North Dakota ban NCAs for nearly all employees. Illinois, Nevada and Virginia prohibit them for low-wage workers.
- New York Democrat governor Kathy Hochul bucked her party last year and vetoed an across-the-board ban on NCAs under pressure from Wall Street. But Empire State courts tend to find in favor of workers that sue their employers in NCA cases.
The majority of state legislatures aren’t considering NCAs. Lawmakers in some states nip efforts to regulate non-competes in the bud. Certain Red state courts resist legislating from the bench on the matter as New York judges do. For example, Texas and Florida courts almost always side with employers in NCA disputes.
The first challenge is likely to be held in Texas. The 5th Circuit Court of Appeals (one rung below the U.S. Supreme Court) would hear an appeal.