FTC moves to ban noncompete agreements in work contracts

A new federal rule against noncompete clauses in work contracts could allow greater flexibility for physicians and other workers changing jobs.

But exact effects are not yet known if the Federal Trade Commission (FTC) bans employers from the practice, which already is regulated by some states.

The FTC announced it is seeking public comment on a proposed rule that would bar noncompete clauses based on a preliminary finding that they are unfair to business competition.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina M. Khan said in a news release.

“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” Khan said. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Effects in medicine

Noncompete clauses have become part of physician employment contract negotiations in recent years. As recently as October 2022, the American Medical Association warned “overly broad noncompete language” is a red flag that young physicians should watch for in their contract talks.

The fallout is not all bad if noncompete clauses protect physician practices from losing patients when a disgruntled doctor leaves to set up a competing practice in the same town, Heidi Moawad, MD, said in a January 2020 article in Medical Economics.

There also are consequences for employed physicians, Moawad said in a Jan. 5, 2023, emailed statement to Medical Economics.

“Noncompete clauses may protect physician groups from the potential professional damage of one or more partners leaving and taking only the more desirable business with them,” Moawad said. “But these clauses can also harm employed physicians if a physician's employer views it as a way to get lackadaisical about giving the physician what the market would otherwise offer – in terms of pay, shared coverage, staff support, facilities, benefits etc.

“When employers don't keep up with fair and current physician work conditions, then physicians who have a noncompete clause will leave and just go further way that the permitted radius,” she said. “Then the employer will have to match or exceed what nearby competitors are offering to attract new physicians. So these noncompetes can be a temporary way for employers to push off fairness to physicians, but it can backfire.”

The latest trends

The practice already may be waning due to state laws and court actions, according to the Society for Human Resource Management (SHRM). Last year Colorado implemented one of the nation’s newest and strictest laws stating noncompete clauses are not enforceable except for sales of businesses, workers earning more than $101,250 a year, or are nonsolicitation agreements signed by workers earning more than $60,750 a year.

California, North Dakota, Oklahoma, and Washington, D.C., banned noncompete clauses, with narrow exceptions, while Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington imposed worker earnings thresholds for noncompetes, according to SHRM.

Along with doctors, companies use noncompete clauses for employees ranging from hairstylists to warehouse workers to business executives, according to the FTC.

SHRM found about 18% of American workers were bound by noncompete agreements, with 38% saying they agreed to one in the past. SHRM cited research including analysis by the Federal Reserve Bank of Minneapolis, which noted the noncompetes are “especially concerning” for reducing pay and negotiating power for lower-wage workers.

The Minneapolis Fed did not break out physicians specifically, but estimated about 32% of professional, scientific, and technical-services workers have signed noncompetes.

Government actions

In its Jan. 5 announcement, the FTC made an economic argument against noncompete clauses, claiming that barring noncompete clauses “could increase wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.”

The FTC proposal followed its Jan. 4 declaration of a crackdown on three companies – a Michigan-based security firm and two manufacturers of glass products and containers – would pay fines for illegally imposing noncompete restrictions on staff.

The FTC took its marching orders from the White House, where President Joe Biden in July 2021 issued an “Executive Order on Promoting Competition in the American Economy.” The president said banning or limiting noncompete agreements would make it easier for workers to change jobs and gain economic mobility. After that order, SHRM advised employers to review noncompete clauses and other restrictive covenants in their worker contracts.