FTC proposes ban on noncompete clauses

In January, FTC  proposed a rule to prohibit companies from including noncompete clauses in employment agreements.

According to FTC, noncompete contracts, which usually prevent employees from seeking employment with a competitor for a certain period after they leave a company, impact roughly one in five American workers. Noncompete clauses have a negative impact on both workers and companies, the agency argued.

"Noncompetes are basically locking up workers, which means they are not able to match with the best jobs," said FTC Chair Lina Khan. "This is bad for competition. It is bad for business dynamism. It is bad for innovation."

If FTC's proposed rule is adopted, companies will not be allowed to impose noncompete contracts on new employees or maintain existing contracts. In addition, the rule stipulates that companies with active noncompete clauses must inform workers that the contracts are void.

FTC estimated that banning noncompete clauses would boost annual employee earnings by up to $296 billion. According to the agency, part of the increase represents an income transfer from firms to workers and consumers to workers, which would occur if firms were compelled to raise prices in response to wage increases aimed at retaining workers.

Response from the healthcare industry

A ban on noncompete clauses would have a significant impact in the healthcare industry, with research suggesting that at least 40% of physicians are employed under restrictive covenants that often prohibit them from working for competitors within a 30-mile radius for a period of one to two years.

Although proponents of noncompete clauses in healthcare say they protect an organization's investment in talent, patient relationships, and research and development, opponents argue that the clauses could potentially suppress wages and negatively impact innovation.

So far, the proposal has received a mixed response from business and industry groups.

For example, the American Hospital Association and the U.S. Chamber of Commerce have pushed back on the proposal, critiquing it as a one-size-fits-all approach. However, the American Medical Association's House of Delegates has adopted policies that favor regulations and legislation prohibition noncompetes for physicians in clinical practice employed by for-profit or nonprofit hospitals, hospital systems, or staffing companies.

According to a senior leader at healthcare staffing company AMN Healthcare, some health systems expect a national ban on noncompetes within the next year, and are considering how to handle existing noncompetes since they could impact hiring.

"I think in a world where the FTC will likely ban these in some form or fashion in the next year, you're potentially causing somebody not to take your job over a part of your contract that may not even be enforceable a year from now," said Cody Futch, VP of recruiting for Merritt Hawkins, AMN's physician solutions division.

If a noncompete clause is too restrictive, it could make it harder for organizations to hire for a position, which leads to them losing money. According to a 2022 Merritt Hawkins white paper, a single physician vacancy leads to thousands of dollars in lost revenue every day the job is unfilled. In particular, a vacancy for an internal medicine physician could result in $7,000 lost per day or $220,000 a month, while a vacancy in cardiology could lead to $9,500 in lost revenue a day or $290,000 a month.

Separately, Greg Button, president of global healthcare services at consulting firm Korn Ferry, said that organizations that remove noncompete clauses without also enhancing retention initiatives could see higher turnover rates, as well as additional cost pressures, in the long term if physicians have more freedom to work for rival companies. This increase in turnover could result in millions of dollars lost from an organization's bottom line.

Some states are already banning noncompete clauses

At the state level, California, Minnesota, North Dakota, and Oklahoma already have total, or close to total, bans on noncompete causes across industries. Now, more states are enacting new legislation banning noncompetes for certain clinical positions.

For example, in Indiana, Gov. Eric Holcomb (R) in May signed legislation prohibiting noncompete clauses from future agreements with primary care physicians. Similarly, Minnesota enacted a new law that went into effect this month prohibiting any future noncompete clauses.

Although these new laws are only aimed at new noncompete clauses, some organizations are also re-evaluating their existing contracts to determine whether the noncompete clauses are necessary.

According to Julie Kline, chief HR officer of North Memorial Health in Minnesota, noncompete clauses can cause frustration and hurt feelings among providers.

"I think of this as being an opportunity for every organization to really rethink all of their policies, their documentation, their handbooks, and truly their culture and values," Kline said. "We really want to look at the ethical side of it [and] the business rationale. Every single thing we have is on the table again to review and really say, 'OK, how do we need to modify our documents?'" (Berryman, Modern Healthcare, 7/26)

On Jan. 5, the Federal Trade Commission proposed a ban on noncompete clauses in employment contracts, and regardless of where the ban lands, employers should take this opportunity to rethink their employee relationships and contracting strategies. Here are three actions physician employers should take.