Although noncompetition agreements (NCAs) have been a staple in associate dentist employment agreements for decades, there could soon be a seismic shift regarding a practice’s ability to limit where an associate can work. This is the result of a rule that was recently issued by the Federal Trade Commission (FTC). In a 3-2 vote on April 23, 2024, the FTC adopted a final rule that essentially bans all NCAs arising from the employer/employee/independent contractor relationship.
This rule will cover almost all dental practices and clinics unless the business is established as a not-for-profit entity. The rule prohibits any “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 rule does not prohibit “exclusivity agreements,” which require that an associate work only for one practice or that prohibit an associate from working for a competing practice during the term of employment. The rule also does not prohibit nonsolicitation agreements or confidentiality agreements. However, if the nonsolicitation agreement is too broad to essentially prohibit an employee from working in a specific geographic area, then it may be determined to be a de-facto NCA and will not be enforceable.
When does the rule go into effect?
The rule takes effect 120 days after it is officially published in the Federal Register. This means it may become effective sometime in September or October 2024. However, there are already legal challenges to the rule that question whether the FTC has the authority to enact a ban on NCAs, or if the Commission usurped Congresses’ legislative authority. There’s a possibility that the courts will issue an injunction, which will stay the rule while the lawsuits are pending.
Impact on existing non-compete agreements
All NCAs between employers and employees will be void and unenforceable once the rule goes into effect. Consequently, any employer that entered into an NCA with a worker will be required to rescind that NCA prior to the effective date.
If the rule becomes effective, employers will be required to provide written or electronic notice to current and former workers who are subject to an NCA. This is to inform them that the NCA is no longer in effect and will not be enforced against the workers, and that the workers are free to seek employment with a competitor of the employer or operate a business that is competitive with the employer.
We recommend that for existing employees, the company provide an addendum to the employment agreement that voids the NCA.
Are there any exceptions?
There are two exceptions to the rule. The first exception permits an NCA in an employment agreement with a senior executive provided it was entered into prior to the ban’s effective date. Once that agreement terminates, even this senior executive cannot be required to enter into a successor agreement that includes a noncompete clause.
However, the definition of who is a senior executive is extremely narrow. A senior executive is defined as a highly compensated person, earning at least $151,164 a year, who has final authority to make policy decisions on significant aspects of operating a business entity. In the dental industry, this is unlikely to be applicable to more than one person in a traditional practice or clinic but may apply to more employees at a large or corporate practice.
The second exception permits an NCA that arises from or ancillary to the sale of a practice. If a dentist sells their practice, the buyer can negotiate the inclusion of a traditional geographic NCA in the purchase agreement.
What are the next steps?
If an injunction against the FTC rule is issued while the litigation is proceeding, then the status quo will maintain. However, until there is clarity from the courts, employers should identify all current and former employees who are subject to an NCA and be prepared to issue the required notification should the rule become effective. Practices should also determine if there are any employees who would fit the definition of senior executive.
This current uncertainty may continue for a while, as the wheels of justice can move slowly. The courts may enforce the ban on NCAs, strike down the ban on NCAs, or permit a modified rule. It’s important for dental practice employers and employees to stay up-to-date on the status of this rule, which could drastically alter the employer/employee relationship in the dental world.
Brent R. Pohlman is a partner in the Mandelbaum Barrett PC labor and employment practice group. Contact him at [email protected]. Mandelbaum Barrett PC is based in Roseland, New Jersey.
