ADA: FTC Issues Ban on Noncompete Clauses

The Federal Trade Commission issued a final rule April 23 banning noncompete clauses nationwide, which aim to prevent employees from engaging in similar business after leaving their current employer.

“The final rule provides that it is an unfair method of competition — and therefore a violation of section 5 — for persons to, among other things, enter into noncompete clauses with workers on or after the final rule’s effective date,” the rule states.

The new FTC final rule applies to noncompetes entered into after the effective date and some noncompetes currently in existence. Specifically, existing noncompetes can remain in force for senior executives after the effective date but not for other workers. The FTC defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

The final rule aims to protect the fundamental freedom of workers to change jobs and support innovation. It will increase new business formation by 2.7%, according to the FTC, which estimates that the elimination of noncompetes will generate more than 8,500 new businesses each year.

The FTC also estimates that the final rule will increase earnings for the average worker by an additional $524 and lower health care costs by up to $194 billion over the next decade.

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” according to an FTC news release. “Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”

Under the new rule, employers have several alternatives to noncompetes that still work to protect the businesses. These include trade secret laws and nondisclosure agreements, both of which offer protection over proprietary and sensitive information. 

The new rule mandates employers to provide notice to workers bound to an existing noncompete that the agreement will not be enforced against them in the future. No legal modification of the existing noncompete is needed.

“If you are a practice owner and have noncompete clauses in employment agreements with associates, hygienists or other staff, or if you are an employee dentist currently subject to a noncompete clause, you may wish to consult with an attorney in your geographic area experienced in these matters,” ADA President Linda J. Edgar, D.D.S., said.  “While the FTC rule may be challenged in court, it becomes effective 120 days after publication in the Federal Register.”
 
State or local bar associations may have a lawyer referral service, and the American Bar Association’s directory of lawyer referral services is available at americanbar.org/groups/lawyer_referral/resources/lawyer-referral-directory/. State dental associations also might be able to recommend an attorney. The ADA has a free downloadable resource for members titled “A Dentist’s Guide to Selecting a Lawyer,” available here.
 
At press time it was unclear whether the FTC rule regarding noncompetes applies to federally qualified health centers. ADA News will provide continuing coverage of developments related to the FTC rule. For more information about the new ruling, see the final rule.