On Jan. 5, 2023, the Federal Trade Commission (FTC) officially proposed sweeping regulatory changes that will have far-reaching impact on employment within the health care industry. Namely, the proposal would ban all future noncompetition clauses as well as nullify existing covenants not to compete.
The FTC asserts that these clauses violate federal law as unfair methods of competition.
In its rulemaking proposal, the agency defines a noncompete clause as a “contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.” According to the FTC, 20% of current U.S. workers are subject to noncompete restrictions.
The regulations would also require employers to inform employees subject to noncompetes that they are invalid.
Currently, without a national ban, noncompetes are governed by state law, which varies wildly among the states.
Restrictive covenants in the medical field
Hospitals, clinics and group practices use noncompetes to keep employees from doctors and nurses to executives, administrators and service workers from leaving to work for competitors.
Medical employers have an interest in keeping doctors and specialists employed because practicing medical professionals often build up long-term treating relationships with their patients. When a physician leaves an employer, their patients may follow them or go elsewhere. In addition, a physician or other health care professional may develop a stellar reputation that also draws people to its employer-provider.
A restrictive covenant can place austere limits on a health care practitioner’s options. For example, a two-year restriction on working for a competitor in the surrounding 100 miles may mean that the employee stays at that job because they have community roots and moving away for two years is not an option.
The agency in its proposal and its Chair Lina Khan in an opinion piece in the Jan. 9, 2023, issue of The New York Times emphasized several policy reasons for banning noncompetes:
- They restrict the “individual liberty” and “economic liberty” of the employee who is “locked into” their job.
- They may have negative impact across the economy on wages and competitive innovation.
- They hold down wage growth in the job they restrict and that might otherwise be obtained with a change to a new employer.
- They stifle creativity, research and the flow of knowledge and talent.
- People feel stuck in jobs that are not good fits for them.
- Entrepreneurs under noncompete restrictions may not open new competitive businesses.
The Chamber of Commerce and other business groups are against the proposal, explains The Intercept, noting that this includes the American Hospital Association.
Khan responds that an employer could still protect its confidential information from leaving with an employee through nondisclosure and confidentiality agreements, and trade-secret laws.
What is next?
The FTC is accepting public comments through March 20, 2023, although the agency could extend that date. The agency could withdraw, revise or approve the rules as written. They would take effect 180 days from publication as a final rule.
Many in the media speculate that should the ban take effect, there will likely be lawsuits challenging whether the agency exceeded its power to regulate unfair competition.
Another issue under debate according to Healthcare Dive and other media sources is whether since the agency has little authority over not-for-profit entities – which proliferate the medical field – would this create two different employment markets? Nonprofit health care providers could use noncompetes, not private providers?
We will watch the progress of this proposal as it would impact many of our South Carolina and Kentucky clients. Regardless of what happens, any doctor, nurse, therapist or other health care practitioner should seek legal advice if noncompete-agreement issues arise for them. On the other side, medical employers like hospitals, clinics and specialty practices may need guidance about drafting or enforcing noncompetes, or how to proceed should the regulations take effect.