FTC Proposes Rule on Non-Competes; How Would It Affect Your Medical Spa?

Posted By Madilyn Moeller, Friday, January 6, 2023

Contract Law

By Patrick O’Brien, JD, Legal Coordinator, American Med Spa Association

On January 5, 2023, the U.S. Federal Trade Commission (FTC) announced that it is proposing a rule that would prohibit non-compete clauses for employees in almost all circumstances. The commission issued a press release (reported here) that lays out its reasoning for wanting to do away with non-competes. This rule is likely a result of an executive order issued by President Joe Biden in 2021 directing the commission to take action on a number of labor practices (see here for article). The FTC views non-competes as exploitive clauses that often have the effect of suppressing wages, hampering innovation and blocking entrepreneurs from starting businesses. Various types of non-competes are common in the medical aesthetic industry. So, how would this rule affect medical spas?

If adopted as-is, the rule would prohibit almost all contractual provisions that would, in effect, prevent the worker from looking for or accepting a new job or starting a business after the end of their current employment. This is defined broadly to include not only direct restrictions, but also terms that would, in effect, do the same thing. As an example, the rule would also prohibit employers requiring employees to pay for training if they leave within a specific period of time, if the payment is not reasonably related to the costs incurred in training. This prohibition would protect both regular employees and independent contractors.

In addition to preventing employers from requiring new non-competes, the rule also would invalidate existing non-competes and prohibit employers from representing to the worker that they are subject to a non-compete. In fact, the employer would have an affirmative duty to inform the employee that they are no longer subject to a non-compete agreement. For medical spas, this would mean that, most likely, none of the employees or independent contractors would be subject to these sorts of clauses, although it will depend on the final language of the rule to determine what sorts of restrictions would be allowed.

There are a few exceptions to the above requirements. The biggest is that non-compete restrictions would still be allowed for owners as part of a sale of a business. In this case, if someone was selling a practice, the buyer could require that the owner not open a competing practice; non-competes would still be prohibited for any employees, however. The other area of exception is that non-disclosure agreements would still be allowed, provided they are not too broadly written to effectively keep their subjects from working in the same field.

What does this mean for you? Are non-competes gone now? No—this is only a rule proposal, and the process for federal agencies to adopt rules is incredibly long. Right now, the rule is in a comment period where anyone can submit feedback or suggestions to the FTC; this period lasts for 60 days following the rule's publication in the federal register. Given that this rule affects all industries and that non-competes are very common, it is likely that the FTC will receive a mountain of feedback. After the comment period, the rule can be changed or altered based on the feedback before it moves to the final adoption. While rule adoption can take only a few months, the process very often gets stretched out to many months or years, sometimes with no rule ever being adopted.

It is also important to remember that this is just one effort. States also do not like overly restrictive non-competes and have passed their own laws and rules to limit their effect. For example, Colorado recently limited non-competes for most workers (see here), and California has a long history of limiting these sorts of agreements (see here). Because the state rules on non-competes are very complex, it is important that you seek the advice of a knowledgeable attorney regarding the legality or enforceability of non-compete agreements—hopefully before you enter into one.

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