Recently, the Federal Trade Commission (“FTC”) published a proposed rule prohibiting employers from using non-compete clauses (also called “restrictive covenants”) in their contracts with workers. Similarly, the New Jersey legislature recently proposed a bill that would limit the scope of restrictive covenants between employers and workers. If finalized, these measures would impact the relationship many physicians, nurses and other healthcare professionals have with their employers.
In its proposed rule, the FTC cited research showing that non-compete clauses by employers have negatively affected competition, reduced worker wages and suppressed labor mobility. “In the Commission’s view, the existing legal frameworks governing non-compete clauses—formed decades ago, without the benefit of this evidence—allow serious anticompetitive harm to labor, product, and service markets to go unchecked.”
The FTC’s Non-Compete Clause Rule would provide that it is an unfair method of competition—and therefore a violation of Section 5 of the Federal Trade Commission Act—for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a noncompete clause; or, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause.
The proposed rule would define the term “non-compete clause” as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the contract provision is called, but how the contract provision functions. Furthermore, the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements and non-solicitation agreements.
In addition to prohibiting employers from entering into non-compete clauses with workers starting on the rule’s compliance date, the proposed rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date. In certain circumstances, the proposed rule would include a limited exception for non-compete clauses between the seller and buyer of a business.
The proposed rule broadly defines “worker” as an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer. The proposed rule would define “employer” as a person—as the term “person” is defined in 15 U.S.C. 57b-1(a)(6)—that hires or contracts with a worker to work for the person.
Similarly, in New Jersey, a proposed bill, A3715/S1410, would restrict the use and applicability of restrictive covenants between employers and employees (or prospective employees). The bill, if passed, would, among other things, limit restrictive covenants to no more than 12 months following the date of employment termination. The bill would also require that the restrictive covenant may not be broader than necessary to protect the legitimate business interests of the employer, must be reasonable in geographical reach and limited to the geographic areas in which the employee provided services or had a material presence or influence during the two years preceding the date of termination of employment, and may not prohibit an employee from seeking employment in other states. Other requirements in the bill would prohibit a restrictive covenant from stopping an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client.
Prohibiting or restricting non-compete agreements is not without precedent as California and North Dakota prohibit the use of non-competes generally, while six other states specifically prohibit the enforcement of non-compete clauses in physician contracts.
Should either the FTC’s rule or the New Jersey’s bill become final it would significantly impact the relationships between physicians, nurses, and other healthcare workers and their employers in New Jersey and New York. If you have questions about non-compete clauses, their impact on your contracts, or the proposed regulatory and legislative frameworks please contact our office.