FTC proposes noncompete clauses ban on employees

Dayton chamber president says it will have a devastating affect on Dayton-area businesses.

The Federal Trade Commission proposed a new rule this month that would prevent all employers from imposing noncompete clauses on their workers and it could have a big impact across all industries.

The proposed rule would prevent employers from imposing contract clauses that prohibit their employees from joining a competitor, typically for a period of time, after they leave the company.

Advocates of the new rule argue that noncompete agreements contribute to wage stagnation because one of the most effective ways to secure higher pay is switching companies. They argue that the clauses have become so commonplace that they have swept up even low-wage workers.

Opponents argue that by facilitating retention, noncompete clauses have encouraged companies to promote workers and invest in training, especially in a tight labor market. The public has 60 days to submit commentary on the rule before it takes effect.

“This blanket proposal by the FTC is out of line and would have a devastating impact on business operations in the Dayton area and the nation. The business community has used noncompete agreements for decades to protect intellectual property, trade secrets and operations strategies,” said Chris Kershner, president and CEO of the Dayton Area Chamber of Commerce. “These agreements have been fairly used by employers and voluntarily agreed to by employees as one of many conditions of employment. Businesses should not be made to feel guilty or wrong for protecting their operations, investments and intellectual property.”

Credit: Submitted

Credit: Submitted

During a Cabinet meeting, President Joe Biden called the FTC action “a huge step forward in banning noncompete agreements that are designed simply to lower people’s wages.”

“These agreements block millions of retail workers, construction workers and other working folks from taking better jobs and getting better pay and benefits in the same field,” Biden said.

For employed physicians, such as those employed at hospitals or hospital systems, noncompete clauses can come in the form of post-contractual restrictive covenants. A restrictive covenant is where, upon termination of a professional contract, a physician may not work in a defined geographical location for a specific period of time, according to the American Academy of Emergency Medicine.

“It’s a big proposition by the FTC,” said Dr. John Corker, president of the Montgomery County Medical Society, which represents all types of physicians across the Dayton region. “This doesn’t impact all physicians the same way, positively or negatively.”

Corker said it could be beneficial for employed physicians if employers were not able to impose restrictive covenants. Employed physicians who lose or leave their positions may have to move if they want to continue practicing in their profession.

“We have had some examples of physicians who have been terminated without cause, but their restrictive covenant or noncompete clause was still applicable,” Corker said. “This would benefit some employed physicians to be able to stay in their homes, to be able to stay in their communities, during a time of career transition.”

For those running independent practices, Corker said this rule could potentially put them at risk of losing their employees to larger organizations.

“Independent practice physicians often have small clinics, small practices, and can’t spread risk as far as some big hospital system or large national staffing firms,” Corker said. “For these independent practices, sometimes these covenants or clauses in contracts maintain their ability to employ a small but consistent workforce in a way that doesn’t allow for larger shop organizations to potentially pilfer away their physicians.”

Dr. Thomas Proctor, first vice president of the Montgomery County Medical Society, said these types of clauses can also help protect independent practices’ relationships and contracts with larger hospital systems.

“When you have a private practice setting or an independent group, oftentimes you have perhaps an exclusive relationship with one of the hospital contracts, and a restrictive covenant like this would potentially benefit your company because it allows you to keep a smaller percentage of your members from perhaps threatening your business model or jeopardizing or seeking a contract that you would potentially have,” said Proctor.

Proctor said there are also antitrust implications, as well, if employees are taking information from one practice to another.

“Physicians are not all employed in a one-size-fits-all model,” Corker said. He said they are advocating for all types of physicians, whether employed or independent, at their medical society, but he added that private practice physicians have had their practices “threatened in a lot of ways over the last several decades.” He said physicians are paid more by insurers if those services are provided at a hospital instead of at an independent office.

Emily Dickens, chief of staff and head of public affairs for the Society for Human Resource Management, said the proposed FTC rule is overly broad and could potentially harm businesses that depend on them to thrive. She cited very small, emerging industries where crucial know-how cannot be safeguarded through non-disclosure agreements alone.

Dickens said SHRM, a group of more than 300,000 human resources professionals and executives around the world, will encourage its members to present specific situations that could justify noncompete clauses during the FTC’s commentary period.

“Dayton-area businesses have paved the way for innovation and creativity since the turn of the 20th century and this culture is still thriving today. If this rule passes it will have a significant and adverse impact on Dayton area companies that must have this freedom to be successful,” Kershner said.

The Associated Press contributed to this story.

What happened?

The Federal Trade Commission (FTC) issued a proposed rule on Jan. 5 that would prohibit employers from using noncompete clauses with workers.

What does the proposed rule do?

The proposed rule, if adopted in its current form, would require employers to:

  • rescind all existing noncompetes no later than the rule’s compliance date (which is not yet determined); and
  • provide notice to current and former workers that the workers’ noncompete clauses are no longer in effect. The proposed rule provides model language employers can use to satisfy this notice obligation.

How does the agency define “noncompete” clauses?

The proposed rule defines “noncompete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.

Why did the FTC do this?

In July 2021, President Biden issued an Executive Order titled “Promoting Competition in the American Economy.” It directed the FTC to exercise its “statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC estimates that the proposed rule would increase workers’ earnings in the U.S. by between $250 and $296 billion per year, and that the ban will close racial and gender gaps by 3.6 and 9.1%.

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