Pennsylvania Restricts Employee Noncompete Agreements for Health Care Workers

The Commonwealth of Pennsylvania has enacted its Fair Contracting for Health Care Practitioners Act, which will prohibit employers from enforcing employment noncompete clauses for medical professionals with limited exceptions. Once this noncompete law comes into force on January 1, 2025, Pennsylvania will join the growing number of states that have restricted the use of noncompete clauses in employment agreements generally and in health care specifically.

While recent rulemaking by the US Federal Trade Commission (FTC) limiting noncompete provisions at a nationwide level has received significant press, the FTC’s rule may ultimately be struck down by courts, [1] and even if it is not struck down the FTC lacks jurisdiction over not-for-profit entities, including nonprofit healthcare companies. For these reasons, companies in the health care sector should pay close attention to the ever-evolving patchwork of state laws regulating noncompete covenants for health care workers.

PENNSYLVANIA FAIR CONTRACTING FOR HEALTH CARE PRACTITIONERS ACT

Pennsylvania’s new law (Act No. 74) generally prohibits noncompete agreements from being enforced against doctors, osteopaths, registered nurse anesthetists, registered nurse practitioners, and physician assistants (Health Care Practitioners). [2]

The law provides for a handful of exceptions:

• If the Health Care Practitioner chooses to terminate employment on their own accord, their former employer may enforce a noncompete covenant in their employment agreement that is under one year in duration. [3] As a result, employers may continue including one-year noncompete clauses in employment agreements with Health Care Practitioners. [4]
• Employers may enforce noncompete covenants against Health Care Practitioners in connection with a transaction involving a sale or transfer of the assets or ownership interests in a business held by those Health Care Practitioners. [5]
• The law does not prohibit the inclusion of other terms of employment such as those concerning garden leave or repayment of compensation. For example, the law expressly allows employers to enforce contract terms requiring reimbursement of reasonable expenses related to relocation or training costs from departing Health Care Practitioners. [6]

In addition to the restrictions on noncompete clauses, the law requires employers to notify patients that their Health Care Practitioner has departed and that their care could be transferred to a new practitioner working for the employer. [7] If patients choose to follow the departing Health Care Practitioner to seek care, the law also requires the employer to instruct patients on how to transfer their health records. [8]

OTHER FEDERAL AND STATE EFFORTS TO REGULATE NONCOMPETE CLAUSES

Pennsylvania’s state-law restrictions on noncompete clauses follow an effort by the FTC earlier this year to ban noncompete agreements at a national level. The FTC’s noncompete rule will become effective on September 4, 2024 absent a court order enjoining it from taking effect. [9] If upheld, the FTC’s rule would only constrain for-profit health care entities, as the FTC lacks authority to issue rules governing nonprofits. [10] Because many US health care entities are nonprofits, the FTC’s noncompete rule would likely not touch a sizable swath of the health care industry. [11]

While significant attention has been paid to this FTC rule, numerous states have passed or introduced laws restricting noncompete covenants, some of which are directed at the health care industry specifically. Jurisdictions with laws in effect that limit noncompete clauses in some form include California, [12] Colorado, [13] Connecticut, [14] Delaware, [15] Florida, [16] the District of Columbia, [17] Illinois, [18] Indiana, [19] Kentucky, [20] Maine, [21] Maryland, [22] Massachusetts, [23] Montana, [24] New Hampshire, [25] New Jersey, [26] New Mexico, [27] North Dakota, [28]Oklahoma, [29] Oregon, [30] Rhode Island, [31] South Dakota, [32] Tennessee, [33]Texas, [34] Virginia, [35] Washington, [36] and West Virginia. [37] Jurisdictions with restrictions on noncompete clauses that will take effect in the near future (besides Pennsylvania) include Iowa[38] and Louisiana. [39] Finally, jurisdictions that have recently proposed legislation to restrict (or further restrict) noncompete clauses include Arizona, [40] Connecticut, [41] Georgia, [42] Kentucky, [43] Missouri, [44] New York, [45] and Tennessee. [46]

This patchwork of state laws varies broadly in application, including the permissible duration and geographic scope of the noncompete clause, if specified; whether the noncompete ban applies to higher-income employees and, if so, at what thresholds; and the types or categories of employees who are protected.

Variation in state laws would exist even if the FTC’s noncompete rule is upheld by courts—while the FTC’s noncompete rule would supersede any state law that “conflicts” with the federal rule (i.e., any state law that would permit noncompete covenants that the federal rule would prohibit), the FTC’s rule would allow any states that have enacted parallel noncompete restrictions to continue enforcing them. [47]

NEXT STEPS

Morgan Lewis is closely monitoring these developments. Employers should continue to review the terms of their employment agreements with health care workers and stay updated on the ever-changing landscape of state and federal laws related to noncompete issues in the health care sector.