What the Impending Noncompete Ban Means for Employees and Employers

Update: On August, 20, 2024, a federal judge in Texas blocked the nationwide ban on noncompete agreements that was supposed to take effect on September 4, 2024. This ruling comes in a case filed by a tax services firm in Dallas that was joined by many organizations that represent business interests, including the U.S. Chamber of Commerce.

The judge in the case said that the Federal Trade Commission (FTC) lacked “substantive rulemaking authority” to issue the rule. The FTC’s spokesperson said the agency is “seriously considering a potential appeal.” Because of the June 2024 Loper Bright decision that overruled Chevron—a landmark administrative law case that afforded deference to an administrative agency's reasonable interpretation of ambiguous law—it is even more unclear how an appeal would be decided given the FTC's authority to issue such rules would potentially be under new scrutiny.

At this time:

• Employers should know that their own state's law will continue to guide adjudication of noncompete agreements they have entered with their employees.
• Employees need to know that any noncompete agreements they signed as part of their employment are still enforceable if their state law allows for their use.

While appeal and subsequent litigation is uncertain, the September 4 deadline for compliance with the FTC rule no longer applies.

Have you been subject to or utilized a noncompete agreement as part of your employment contract? These agreements—sometimes included as “clauses” in your employment contract—restrict where, when, and how an employee can work while they are in or once they leave a job, including both contract and W-2 positions. Many employers have used them to protect their businesses, while many employees feel they operate as restraint of trade. But, come September 4, 2024, they will largely be a thing of the past.

Learn more about the rule below:

• History and the Vote
• The New Rule
• How This Will Impact Employees and Employers
• Key Components
• Alternatives
• Future of the Rule

Last year, the FTC proposed a rule that would ban their use. The highly contested rule saw over 26,000 public comments, over 95% of which were in support of the ban. ASHA members were very divided on the issue, with both employers and employees providing feedback to ASHA via a poll.

The FTC voted on April 23, 2024 to issue a final rule [PDF] effectively banning most noncompete agreements. FTC Chair Lina Khan noted that “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism…[the new rule] will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC commissioners’ votes went down party lines (3-2), with both Republican commissioners sharing fervent dissent that the FTC lacked the legal authority to make rules regarding unfair methods of competition, and that the final rule should be eliminated because of the “major questions doctrine [PDF].” The major questions doctrine maintains that courts, not administrative agencies, should resolve questions of “vast economic and political significance” when applicable law is absent.

This rule’s finalization shattered the entire patchwork of state-based noncompete common law, legislation, and regulation. Before this rule, individual states decided how noncompete clauses should be implemented and/or adjudicated without much, if any, federal involvement. Now, as of the rule’s effective date on September 4, 2024, states and any employers therein cannot independently decide the scope and breadth of noncompete clause usage within their boundaries and are subject to the FTC’s ban.

The New Rule

To help with the rule’s implementation, the FTC created a compliance guide [PDF] for businesses and small entities that outlines the three main components to the rule:

1. It prohibits employers from entering into new noncompete clauses with all workers, whether full time or part time, including independent contractors, interns, externs, volunteers, apprentices, and others as of the effective date.
2. It voids existing noncomplete clauses for all workers other than senior executives as of the effective date. Note that the rule does not allow future noncompetes even for those senior executives.
3. It requires all employers who have used these agreements to provide clear and conspicuous notice to their current and former workers subject to a banned noncompete clause that it cannot be legally enforced against them. Employers must do this prior to September 4, 2024.

As part of its compliance guide, the FTC provided downloadable model language [DOCX] that employers can use when notifying employees in their own business. While the specific language the FTC provides is not required, employers must provide written notice to their eligible employees that their existing noncompete clauses are no longer in effect and will not be enforced.

How the New Rule Impacts Audiologists, Speech-Language Pathologists, Assistants, and Clinical Fellows

If you are an employee and subject to a noncompete agreement as part of your employment, you can still be subject to that noncompete clause until the effective date of the FTC ban. Additionally, if you were already subject to a lawsuit related to a noncompete agreement before the effective date, the new rule does not vacate existing litigation or litigation that could arise before the effective date occurs. Until the effective date, employees should be on the lookout for written notice from their employers that the noncompete is no longer enforceable as of September 4, 2024. Employers may notify employees via an all-staff email, an individualized email, a printed document, or another written way they may choose to provide notice.

If you are an employer who utilizes noncompetes in your practice, you must notify your employees that those clauses are no longer enforceable using the FTC’s model language or your own that achieves the same aims before or by September 4, 2024. Employers can consider investigating and litigating any existing noncompete violations before the effective date occurs.

If you know of employers who are still enforcing these agreements unlawfully as of September 4, 2024, you can report their noncompliance with the rule by sending an email to noncompete@ftc.gov.

Key Components of the Final Rule

Exceptions

The final rule includes some important exceptions.

1. Senior Executives

Existing noncompete agreements for senior executives may still be subject to a noncompete clause going forward “Senior executives” is a term of art defined in the rule as a worker who 1) was in a “policymaking position” at the time the noncompete clause was executed; and 2) received total annual compensation of at least $151,164 in the year before the noncompete was executed. A policymaking position is one like the business entity’s president, CEO or the equivalent, or any other officer of a business entity who has policymaking authority. Policymaking authority is the final authority to make decisions that control large and important aspects of the business entity. The exception does not include those workers who have authority over a subsidiary or affiliate of a common entity.

In the case of senior executives who are exempted by this rule, existing state noncompete laws will be the source of law for any adjudication of noncompetes to which they are still subject.

2. Sale of a Business

The final rule also states that noncompetes entered into by a person pursuant to a sale of a business entity, of a person’s ownership in the business entity, or all or most of the business entity’s operating assets are exempt from the ban. There is no specific threshold ownership percentage requirement in the final rule. The sale of the business must be bona fide, which is defined as when the sale is between two independent parties in which the seller has a reasonable opportunity to negotiate the terms of the sale. If the sale results from mandatory stock redemption or repurchasing rights, those would not be considered bona fide because no goodwill is being exchanged
for the noncompete and the lack of ability to negotiate the terms or conditions of the sale at the time of contracting.

3. Other Exemptions

Franchises and franchisees are exempt from the rule, though noncompetes between franchisor/franchisee and their employees would still be subject to the rule.

Some employers are not part of the FTC’s jurisdiction and thus are not subject to the rule, including banks, credit unions, air carriers, and certain nonprofits. Since many health care organizations (hospitals, for example) are nonprofit organizations, they may not be subject to the FTC’s final rule. Health care is one of the biggest areas where noncompete clauses are currently used.

There is a two-part analysis to determine whether a nonprofit organization (an organization that formally claims that title through use of its tax-exempt status) is subject to the rule:

1. The source of its income: “whether the corporation is organized for and actually engaged in business only for charitable purposes.”
2. The destination of the income: “where either the corporation or its members derive a profit.”

If the nonprofit entity can establish that it is not subject to the FTC ban through its tax-exempt status and by satisfying the two criteria of this test, then any noncompete clauses used in its contracts would still be enforceable. There are additional considerations for when a nonprofit hospital is contracted or otherwise works with a for-profit entity to deliver health care services—for example, in the case of a staffing agency or a for-profit physician group.

Alternatives to Noncompetes

The final rule still supports alternatives to noncompetes that will help employers protect their businesses while allowing employees more freedom to seek employment elsewhere once a position ends. The rule is clear that employers are still able to use clauses such as nondisclosure agreements and nonsolicitation clauses, like those described in this ASHA resource. However, the rule also specifies that if one of these types of clauses is written and functions like a noncompete clause, then that clause would also be banned. For example, if the employer chooses to use a nondisclosure agreement, but it is written so broadly as to include such a large scope of information that it functions to prevent a worker from seeking or accepting work in the same field or starting a similar business after they leave, it would be prohibited.

Any alternatives should be carefully crafted so that you are limiting employee actions only enough to protect a legitimate business interest. For example, an employer could restrict nonsolicitation terms only to current customers with which an employee had material contact within a “reasonable period” leading up to the employee’s restricted period or prohibiting only active solicitation with the premise that passive acceptance of work from a customer would be acceptable.

The Rule’s Fate Remains Unsettled

From its inception, the final rule was subject to litigation due to its sweeping nature and effect on existing state laws. Dissenting commissioners asserted that the FTC lacked authority to issue such a ban. Within weeks, the U.S. Chamber of Commerce and other private litigants had filed actions to vacate the rule under the Administrative Procedures Act, which would delay the rule’s implementation.

On June 29, 2024, in Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court reversed its long-standing precedent in Chevron USA, Inc. v. Natural Resources Defense Council (1984), which required courts reviewing federal agency actions to afford significant deference to agency expertise and interpretations on matters of law. Chevron was a landmark decision that paved the way to 40 years of administrative rulemaking when laws as written did not offer enough clarity, and subject matter experts at federal agencies stepped in to offer additional detail through the formal, public rulemaking process. Critics of Chevron have said the resulting doctrine gave unelected federal bureaucrats too much power in crafting regulations that touch every area of American life.

It’s unclear how Chevon’s demise will affect the FTC’s noncompete ban, but it’s all but guaranteed that there will be additional legal challenges like the ones that have already begun in Texas and Pennsylvania.

If, after a long and litigious battle in the judicial system, the FTC noncompete ban is struck down, state law would once again be the ultimate source of authority in cases where an employer chose to use a noncompete agreement and an employee agreed to its terms by signing it.

Questions?

We will keep you posted if things change. In the meantime, employers and employees must plan for the ban to take effect on September 4, 2024.

ASHA will be updating our noncompete agreement resources over the coming weeks. Contact ASHA’s health care and education policy team at reimbursement@asha.org with questions.

We encourage you to seek legal counsel in your state for questions or guidance on specific noncompete agreements.