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On April 23, the Federal Trade Commission (FTC) voted 3-2 to adopt a new rule that broadly prohibits employers from enforcing non-compete agreements against employees.
While the regulatory timeline for the non-compete agreement is relatively short-term, the arrangement will face strong legal pressure from various groups, particularly in the healthcare sector. Regardless of what the courts ultimately decide, home care employers must understand the significance and impact of Tuesday’s vote.
Chip Kahn, president and CEO of the Federation of American Hospitals, expressed the ban’s impact on health care in a statement released shortly after the FTC’s vote. His comments focus on hospitals, but the views could also apply to the home health, home care and hospice markets.
“This final rule is a double whammy,” Kahn said. “The ban makes it more difficult to recruit and retain nurses while creating an anticompetitive, unlevel playing field between tax-paying and tax-exempt hospitals – an outcome that the FTC rule was precisely designed to prevent.”
Some home care employers use noncompete agreements to discourage former executives from revealing company secrets or starting a new business. Non-compete clauses can also be a particularly important part of the M&A process and offer the buyer a certain level of competition protection.
Non-solicitation agreements — another type of agreement in home care that discourages clients from directly hiring caregivers — are more commonly used by provider employers. They are not the same as non-compete agreements, but the FTC ban could cause confusion about how they are used.
“Our industry has non-solicitation laws that are designed to protect the provider’s business, not to restrict the caregiver,” Angelo Spinola, director of home health, home care and hospice at law firm Polsinelli, previously told Home Health Care News. “They work where they want to work; It’s just a matter of not taking an agency’s clients with you because the only reason they know them is because of the agency. I think that’s a fair position.”
In this week’s exclusive members-only HHCN+ update, I highlight key provisions of the FTC’s final rule and discuss what will happen next.
Unpacking the non-compete clause
From the time the FTC proposed its non-compete agreement to the end of the comment window on that proposal, more than 26,000 comments were received. About 25,000 of those comments supported the ban, with the majority of that feedback coming from people in the health care industry, according to the commission.
The FTC’s noncompete agreement will become effective 120 days after the rule is published in the Federal Register. At that point, employers must stop enforcing existing non-compete agreements against certain employees, while at the same time informing employees that they are no longer required to honor previous commitments.
One point home care employers should keep in mind is that their top executives may be exempt from the rule if an existing agreement is in place. Specifically, the final rule states that senior employees who earn more than $151,164 and are in a “policy decision-making position” are not covered by the ban.
However, employers are prohibited from entering into or attempting to enforce new non-compete agreements, even if they affect senior employees.
According to an FTC fact sheet, less than 1% of employees under the final rule are executive employees.
Another critical issue in the FTC rule is how it deals with nonprofit employers, of which there are many in the home health, home care and hospice sectors.
The broad belief is that the FTC’s jurisdiction does not cover organizations that claim nonprofit tax-exempt status. In the 570-page final rule, the Commission makes clear that this is not always the case.
“The mere assertion of tax exemption on tax returns is not dispositive,” the final rule clarifies.
For example, if a nonprofit organization conducts business on behalf of for-profit members, it could still be bound by noncompete standards.
Another important exception
Although transaction activity in the home health, home care and hospice sectors has declined recently, deals are still being completed.
And when it comes to mergers and acquisitions, the FTC’s non-compete agreement includes exceptions between the buyer and seller of a company. In other words, sellers won’t be able to monetize their business, then turn around and open a competing player in the same market, perhaps even taking on key employees in the process.
Furthermore, the exceptions appear to be quite broad and comprehensive.
The FTC originally proposed limiting non-compete agreements between buyers and sellers only if the sellers held at least 25% ownership of the business being sold. This language was not included in the final rule, in part because commenters successfully argued against it.
“Most commentators who supported some form of non-compete exceptions between the seller and the buyer of a business asserted that they were necessary to protect the value of the sale by ensuring the effective transfer of the company’s goodwill,” it said it states in the final rule. “According to these commentators, a buyer will be less willing to pay for a business if it cannot receive assurance that it will be protected from future competition from the seller, and therefore a failure to exempt related non-compete agreements may deter acquisitions. “
The FTC also declined to include provisions requiring a non-compete clause to become effective only after a certain value or dollar amount.
According to M&A firm Mertz Taggart, there were at least twelve home care contracts in the first quarter of 2024.
What about non-solicitation clauses?
During the public comment window on the proposed rule, many commenters called on the FTC to revise its rulemaking to specifically cover non-solicitation provisions, which prohibit employees from conducting business with “potential or actual customers” to the extent that they effectively would prevent me from continuing to work in the same area.
Other comments also requested that the FTC include language that would prevent employees from doing business directly with their former employers’ customers. In home care, this means that customers “poach” caregivers from their agency.
In its final rule, the FTC clarified that it does not equate non-compete agreements with non-solicitation agreements and leaves room for the latter.
“Non-solicitation agreements are generally not non-compete clauses within the meaning of the final rule because, although they limit who an employee may contact after leaving employment, they do not, by their terms or necessarily by their effect, prevent an employee from doing anything to seek or accept other work or to start a business,” the commission wrote.
But non-solicitation agreements will remain somewhat of a gray area, as they could function more like a non-compete agreement under the right conditions.
“Whether a non-solicitation agreement – or a no-hire agreement or a no-business agreement, both of which were referred to by the commenters, as previously noted – meets this threshold is a fact-specific inquiry,” the FTC noted.
Tuesday’s final rule does not impact trade secret laws and nondisclosure agreements (NDAs).
More thoughts on what comes next
The FTC’s non-compete agreement has arguably the biggest impact on the healthcare sector.
As healthcare has consolidated, these consolidators have worked to gain more control over the physicians who run the business. To illustrate this idea, previous research has found that up to 45% of U.S. physicians are subject to non-compete agreements.
In fact, when developing its proposal, the FTC considered a 2016 paper published in Management Science entitled “Screening Spinouts,” which assessed the economic impact of non-compete agreements in healthcare.
The FTC estimates that removing non-compete agreements from the healthcare industry could reduce healthcare costs by more than $194 billion over the next decade.
Looking at the overall economic situation, the FTC estimates that its final rule will result in new business growth of 2.7% per year, resulting in more than 8,500 additional new business starts per year.
Going forward, the FTC ban will be challenged in court.
The US Chamber of Commerce has already announced its intention to sue.
“The Federal Trade Commission’s decision to ban non-compete agreements with employers across the economy is not only unlawful, but also a blatant power grab that will undermine the ability of American companies to remain competitive,” said Suzanne P. Clark, President and CEO of the organization in a statement.
Still, many states and cities already have their own non-compete agreements, many of which focus on healthcare. The FTC’s final rule could enable more states and cities to follow suit.