The Federal Trade Commission (FTC) announced a major ruling severely limiting non-compete clauses for the vast majority of American workers in April 2024, eliminating non-competes moving forward and voiding existing ones for 99% of workers in the U.S.
A covenant not to compete, or, more colloquially, a non-compete agreement, is a written agreement between an employee and their employer that typically limits where and how they can work after leaving their current job.
The FTC’s ruling will greatly impact the entire workforce, but especially those in the healthcare industry, where non-competes are common, particularly for physicians early in their careers. Here is our complete guide to non-competes and the new FTC non-compete ban, as well as how this specifically affects physicians in Arizona.
The FTC Non-Compete Ban
On April 23, 2024, the FTC issued a ruling that bans non-compete provisions in the employment setting; it will take effect on September 4, 2024 provided no legal challenges to the ruling succeed.
What the Non-Compete Rule prohibits
The FTC’s new ruling not only prohibits the creation of new non-compete agreements for most American workers, it also nullifies most existing non-competes. This ruling affects any worker in a for-profit entity as well as some nonprofits, so long as they are not a senior executive in a policy-making position making over $151,164 yearly. For those executives who, according to the FTC, make up .75% of the workforce, their non-competes will stay in place.
This will open the way for workers who would otherwise be geographically limited in their choice of work, forced to wait a given period of time, or even forced to seek a lower paying position elsewhere. Additionally, this will make it easier for workers to start their own businesses.
AMA Attempt to Ban Non-Competes in the Past
The American Medical Association (AMA) is in support of eliminating non-compete agreements for physicians. They have been vocal about past support, citing that younger physicians are subject to severe non-competes that keep their wages down and can even be used as a threat should employees advocate for better conditions, particularly in the wake of the COVID-19 pandemic.
Non-Compete Agreements
According to the FTC, non-compete agreements affect roughly 1 in 5 American workers. Workers in all industries face these agreements such as those in tech, sales, and healthcare. Within the medical industry, physicians often end up signing non-compete agreements.
Relevance for Physicians
Early-career physicians often sign a non-compete agreement at the point of hire, often with a hospital system. These agreements usually prohibit a doctor from practicing within a specific geographic radius, often for months if not years. In some circumstances, the geographic radius in non-compete agreements extend 25-50 miles, which would force a physician to either relocate or if allowed, pay a large sum of money to buy their way out of a non-compete.
The AMA supports the elimination of non-compete agreements. They cite suppressed wages and employers tying workers to them for a long time without any benefit to the worker. Additionally, the association cites hospital systems that threatened termination (with a non-compete still in effect) of doctors who advocated for better working conditions during the initial phases of the COVID-19 pandemic. This threat would result in months, if not years, of unemployment before being able to find work in the same area again.
Scope and Duration of a Non-Compete
A typical non-compete limits a geographic area of work for a specified amount of time. For physicians, practice is typically limited within a 5-50 mile radius, based on population density and other considerations of their area of practice.
How Enforceable is a Non-Compete in Arizona
Non-compete agreements are enforceable in Arizona so long as a court would deem them reasonable; courts in Arizona will closely scrutinize non-compete agreements that have the potential to interfere with the doctor-patient relationship.
That being said, when the FTC ban takes effect in September, Arizona non-competes will be banned provided they do not meet the very specific exceptions outlined in the FTC’s rule.
Future Outlook for Non-Competes
The FTC’s ruling will effectively eliminate a non-compete from use for the vast majority of cases starting in September. Employers can still implement non-disclosure and non-solicitation agreements, which will help safeguard from soliciting patients and other employees of an employer.
Some states have legislation already limiting non-competes; Arizona is not one of them. Regardless of legislation, the FTC ban will supersede state law as it has national jurisdiction. It can also limit some non-competes for non-profit entities.
Goldberg Law Group's Stance on Non-Competes
Non-compete agreements can be beneficial to employers who spend significant time and resources recruiting specialized or highly sought after physician’s to join their organization. Employers use non-competes to protect their investment and minimize the risk of a physician leaving to join a competitor. However, in recent years, disfavor towards non-compete agreements has been increasing amongst industry stakeholders and workers.
In light of the FTC’s ruling, all employers who have non-compete agreements with workers should consult with an attorney to determine whether the agreements will be subject to the ban, and what, if any, alternative measures can be taken to protect their investment in their workforce.
Similarly, employees who are subject to non-compete agreements should also consult with an attorney to determine whether the agreements they signed will be eliminated by the FTC’s ban.
While challenges to the FTC’s ruling have been asserted which have the potential to delay the ban from taking effect, it is a good time for employers and workers alike to review any non-compete agreements in effect.
FAQs About Non-Compete Clauses
What is a non-compete?
Non-competes are written agreements between a worker and their employer. Generally, they address a worker’s field, the time period in which a worker can find new employment, or the geographic location of their employment. To use a concrete example, a doctor might not be able to practice their specialty of medicine within a 50 mile radius of where they currently work. Additionally, non-competes either prohibit outright or severely limit a worker’s ability to start a business themselves in the same field.
Do non-competes hold if fired or let go?
This depends on the agreement signed. For some cases, it is true that even if fired or laid off, a non-compete will still take effect.
How hard is it to get out of a non-compete?
Some non-compete agreements include exceptions or ways the restrictions can be voided; generally a lump sum of money would allow a physician to ‘buy their way out’ of the agreement, but this sum usually reflects an entire year’s worth of wages. As such, particularly for early-career physicians, it’s difficult to produce money.
Other non-competes only take effect after employment for a specific amount of time; one can also theoretically get out of a non-compete by leaving before the allotted time passes. For example, if a non-compete only takes effect after two years of employment, quitting before then would prevent a non-compete from taking effect.
What happens if you ignore a non-compete?
If you ignore the terms of a non-compete agreement, you are opening yourself up for liability and litigation for breach of contract, which could result in financial penalty as well as penalty to your career.
Conclusion
Non-competes can be useful for employers to ensure loyalty, but also a burden for employees unhappy with their working conditions or wages. Either way, they are likely to be short lived in the U.S., but in the meantime, understanding the full terms of a non-compete is vital for both sides of the employment relationship. Please contact us if you have further questions or would like to be represented in regards to litigation surrounding non-compete clauses.