The US Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing noncompete agreements on their workers, on January 5, 2023. The FTC views such employment clauses as “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
In seeking public comment, the FTC offered an overview.
“About one in five American workers—approximately 30 million people—are bound by a noncompete clause and are thus restricted from pursuing better employment opportunities. A noncompete clause is 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.”
“Because noncompete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them, as well as workers who are not. Noncompete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas. The Federal Trade Commission proposes preventing employers from entering into noncompete clauses with workers and requiring employers to rescind existing noncompete clauses.”
“The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that noncompete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed.”
Such FTC rules changes were earlier signaled by President Joe Biden’s wide ranging Executive Order on Promoting Competition in the American Economy of July 9, 2021. The White House Executive Order specifically stated one goal was to make it easier to change jobs and help raise wages by banning or limiting noncompete agreements via FTC rules changes.
In a written January 5, 2023 statement of FTC chairperson, Lina M. Kahn, were disturbing examples of corporate abuses towards labor utilizing noncompete agreements. Also highlighted were the costly anti-competition models, which harm workers and overall industry growth.
The letter referenced what was learned from noncompete employment clauses examined from the states. “(R)esearch shows that some employers continue to use noncompetes even in states that have declared them null and void. As a result, workers in states where noncompetes are unenforceable are about as likely to have one in their contract as workers in other states.”
FTC commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya issued an ancillary statement also on January 5, 2023. Noncompete clauses were perceived as generating a negative impact on workers and the overall economy. “Addressing the scourge of noncompete clauses that restrict the job mobility of workers advances our mission by ensuring that workers have the chance to compete to earn a fair wage and family supporting benefits.”
“Although sometimes referred to as noncompete ‘agreements,’ they rarely represent actual agreements. Instead, they are often imposed on workers with no ability to bargain as a condition of employment. Even when noncompetes have been ruled unenforceable by courts or outlawed by legislation, firms continue to use them.”
The lone dissenting perspective was issued in a statement by FTC Commissioner Christine S. Wilson. Wilson contends “What little enforcement experience the agency has with employee noncompete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition. Lacking enforcement experience, the Commission turns to academic literature – but the current record shows that studies in this area are scant, contain mixed results, and provide insufficient support for the scope of the proposed rule.”
Wilson’s formal letter foreshadows that whatever path the FTC decides to take, ultimate decisions will be made in the federal court system.
Some states have enacted legislation to effectively ban employment noncompete agreements. Such is the situation in Oklahoma, California, North Dakota, as well as Washington DC.
Other states like New Mexico have enacted limited noncompete legislation. In the case of New Mexico’s statute, healthcare practitioners are the only workers exempt from noncompete employment clauses with certain limitations. Limitations may include loan repayment, relocation expenses, a signing bonus, and incurred costs of training.
In most states, other employment contract agreements remain in full effect. These include nondisclosure provisions and nonsolicitation clauses. However, the FTC has argued these agreements must not be written to be overly broad, to in effect generate a noncompete clause.
The New Mexico statute also states, “This act does not apply to agreements between health care practitioners who are shareholders, owners, partners or directors of a health care practice.”
Such language would generally protect a buyer of a dental practice from the seller immediately post-sale, setting up a new practice next door. However, some harm may come to a dental practitioner, who may have been a nominal shareholder or owner of a shell company dental practice, which was beneficially owned by a larger parent company, like a dental support organization (DSO).
Colorado enacted HB 22-1317 into law on August 10, 2022. Banning of noncompete agreements would not apply “for ‘highly compensated workers’ as determined by the Division of Labor Standards and Statistics in the Department of Labor and Employment.” In effect, the law would only impact workers earning under $101,250 annually. Thus, most doctors would be exempt, while other dental team members would have the statute applied.
The FTC has viewed noncompetition agreements to be generally anti-competitive. Both higher and lower wage workers may be restricted in their earning potentials. Economic growth of a region may suffer. New businesses are discouraged from operation.
Certain dental companies have abused noncompetition clauses by requiring employees to sign such contracts, even when unenforceable. Many noncompete agreements come into effect, on day one of employment. Dentists misclassified under IRS tax rules as “independent contractors” versus “employees,” as a corporate FICA tax dodge, may be required to sign noncompetition agreements.
It is not rare for an unscrupulous DSO attempting to legally enforce an outrageous noncompete clause against a doctor at a specified distance from every clinic, which they operate within a state. This can effectively force a dentist to relocate out of their state of residence and clinical practice. Dentists and the public interest all suffer.
Workers often lack financial resources to pursue valid legal redress. While this is frequently the case for dental auxiliaries and office staff, the same is common for doctors. Certain dental employers may retain legal resources to “make examples” out of current and former employees, who speak out for rights in the workplace.
An interesting related lawsuit is Craig Spodak, DMD, and the Spodak Dental Group (Del Ray Beach, Florida)), versus Jennifer Muir, DDS (15thJudicial Circuit, Palm Beach County, Florida- filed 08/22/2022- case no. 502022CA007785XXXXMB Div. AE). Spodak alleged Muir, an independent contractor dentist, breached their contract by solicitation of Spodak’s employees and independent contractors. The suit also alleged Muir unlawfully took patient records from Spodak’s offices, and posted photos of Spodak’s patients on social media.
According to the court filing, Spodak and Muir entered into a one-year independent contractor agreement (7/1/2019-6/30/2020) for Muir to work in his Delray Beach Office. Classified as “independent contractor,” Muir was to be paid no less than $500 or day, or she would receive 32% of net collections minus 32% of fees assessed by Spodak’s in-house lab (as determined by Spodak). She was also incentivized to promote Invisalign by being offered a reduced price for Invisalign lab work.
Muir’s classification of independent contractor seemed suspect, as Muir was dependent upon Spodak’s workplace resources. The independent contractor agreement, Exhibit A stated, “The contractor (Muir) agrees that the Company (Spodak) shall determine all fees to be charged for all services rendered and products sold at the Company’s dental practice and that the Company shall solely determine all payment, reimbursement, insurance plan participation and other fee-related policies; and the Contractor agrees to comply with the same.”
“The Contractor further agrees that all fees payable in connection with all dental services provided by the Contractor during the Term are hereby, and shall be, assigned and paid to the Company, including, without limitation, all third party and government payments.”
Muir, as a clinical dentist, was also dependent upon auxiliary staff retained by Spodak, to provide workplace services of dental care.
Again, this was a strong indicator under IRS rules, that Muir in reality should have been classified as an employee.
The Florida state circuit court dismissed the case in August 2022. Neither party has since commented.
Misclassification of employees may in fact render contract clauses null-and-void, as the totality of the contract was predicated upon allegedly a bogus pretext.
Currently, the FTC is in the phase of seeking public comment on rules changes. Certainly, there exist reasonable exemptions to noncompete agreements in dentistry, such as the sale of a dental practice and its associated asset of good-will. Hopefully, rational accommodations will be made.
Regardless, the push for change is robust at the federal level. The FTC is almost certainly going to outlaw much of what is currently allowed under noncompetition clauses in employment contracts.
This will encompass not only the healthcare business inclusive of dentistry, but every industry nationally.
ABOUT THE AUTHOR
Dr. Michael W. Davis practices general dentistry in Santa Fe, NM. He also provides attorney clients with legal expert witness work and consultation. Davis also currently chairs the Santa Fe District Dental Society Peer Review Committee. He can be reached at MWDavisDDS@Comcast.net.