Biden Scrutiny of Labor Competition Extends to Bank Noncompetes

The Federal Deposit Insurance Corp.'s updated bank merger guidelines for the first time seek to ban noncompete clauses in employment contracts when banks are eyeing deals, extending the Biden administration’s focus on labor market competition.

Deals that would result in a bank holding more than $100 billion in assets would face heightened FDIC scrutiny under the banking regulator’s proposed overhaul to its bank merger policy announced last week. The revamped guidelines would also explicitly ban the enforcement of noncompete agreements for employees at covered banks of all sizes in certain contexts—a move that antitrust and employment law professors say reinforces a broader effort by the federal government to tackle contracts that restrict employee mobility.

“We’ve seen a reconsideration of how various federal agencies can make labor markets more competitive. Noncompetes have been part of that discussion,” said Evan Starr, an associate professor at the University of Maryland who researches noncompetes. “I see the FDIC move here as another extension of that federal push.”

So far, the FDIC is alone among the three federal banking regulators with authority to approve mergers in proposing that banks applying for deal approval must avoid imposing noncompete agreements on affected employees. The Office of the Comptroller of the Currency and the Federal Reserve, which mostly oversee larger banks and bank holding companies, don’t have similar prohibitions.

Read More: Capital One’s Discover Buy Puts Antitrust Regulators to the Test

The FDIC’s decision to zero in on noncompetes, which prevent employees from working for competitors after leaving their jobs, comes as the Federal Trade Commission is expected to vote in the coming weeks to finalize its proposal to ban noncompetes nationwide. The National Labor Relations Board’s top lawyer has also weighed in, stating in a memo last year that noncompete agreements largely violate federal labor law.

“I don’t think we’ve ever seen so much regulatory scrutiny on the fine print of employment contracts—and it’s coming from all angles,” Starr said.

Mixed Reaction

Critics say noncompetes reduce competition in talent markets and have harmful ripple effects beyond the individual employees subject to the contracts.

In the banking sector, the harm of noncompetes imposed on highly skilled workers “extend to the market as a whole—innovation, customer service, equality, and inclusion,” said Orly Lobel, a law professor at the University of San Diego who specializes in employment and labor policy.

The FDIC’s crackdown on noncompetes is aligned with the FTC’s proposed nationwide ban, Lobel added. Since the FTC Act largely exempts banks from that agency’s regulatory authority, the FDIC’s mention of noncompetes in its bank merger proposal could fill gaps in the banking sector if the FTC’s ban does take effect.

But some are concerned about the FDIC’s approach.

The agency’s proposal targets a scenario when a newly merged bank might impose noncompetes on its former employees, preventing them from getting hired by bank branches it had to spin off to get the deal done, said Patrick Hanchey, a partner at Alston & Bird LLP based in Dallas.

But it’s unclear just how often such a scenario appears in the context of bank mergers, and prohibiting noncompetes could hurt banks by allowing for well-connected lenders to take business to competitors, he said.

“It’s really attempting to solve a perceived problem with a sledgehammer rather than a scalpel,” Hanchey said. “Something more finely tuned would be appropriate.”

An alternative would be to require banks seeking deal approval to lift any restrictions on loan officers at divested branches that otherwise would have prevented them from operating in the branch’s local community, he added.

Deal-by-Deal Reviews

Regulators can also bar noncompetes in the context of individual bank mergers, short of a formal policy.

The FDIC required Umpqua Holdings Corp. and Columbia Banking System Inc. not to enforce any noncompetes on employees at branches that were sold off as part of the approval process for their 2023 deal.

“When mergers are conditioned by divestitures, there will be significant attention to ensure that buyers of divested assets can successfully replace competition lost by the transaction,” Consumer Financial Protection Bureau Director Rohit Chopra said in a March 21 speech at the Peterson Institute for International Economics in Washington. Chopra sits on the FDIC’s board of directors and previously was an FTC commissioner, giving him insight into both banking and antitrust issues.

The FDIC differs from other bank regulators in its oversight of small community banks that aren’t members of the Federal Reserve System. The OCC regulates, and approves mergers for, national banks, and the Fed does so with some community banks as well as giant bank holding companies such as JPMorgan Chase & Co. and Bank of America Corp.

The OCC didn’t include noncompete considerations in a proposed update to its merger policy statement issued in January. But acting Comptroller of the Currency Michael Hsu, who leads the OCC and sits on the FDIC’s board, voted to approve the FDIC’s proposed merger policy statement.

The OCC declined to comment when asked whether noncompete provisions would be added to the agency’s final updated statement of merger policy. Comments on the OCC’s proposal are due April 15.

Read More: FDIC’s Bank Merger Overhaul Leaves Midsize Lender Deals in Limbo

Narrow Scope

The FDIC’s proposed noncompete ban is limited to a specific context: Employees of entities divested in a bank merger process, to assuage anticompetitive concerns, wouldn’t be allowed to abide by noncompete clauses.

“To promote the ongoing competitiveness of the divested business lines, branches, or portions thereof, the FDIC will generally require that the selling institution will neither enter into non-compete agreements with any employee of the divested entity nor enforce any existing non-compete agreements with any of those entities,” the FDIC said in its proposed statement of policy.

Despite its relatively narrow scope, some industry watchers say the FDIC’s decision to single out noncompetes could reverberate.

Griffin Pivateau, associate professor of legal studies at Oklahoma State University, said he sees the policy proposal as “a warning shot across the bows of industry in general,” reminding employers to think carefully about the possible consequences of noncompetes.

“It’s a signal to industry that the government cares about competition in the labor market,” Pivateau said.

Federal agencies, Pivateau added, are likely following the FTC’s proposed noncompete ban and “feel encouraged to exercise their own restraints.” A handful of states including California and Minnesota have enacted their own versions of noncompete bans, while New York’s governor vetoed a legislative ban on noncompete agreements.

Other banking regulators should follow the FDIC’s lead by limiting noncompetes in bank merger approvals, and should look at other ways to eliminate them throughout the industry if possible, said Lee Hepner, senior counsel at the American Economic Liberties Project, an antimonopoly group.

“It would be consistent with other branches of the government,” he said.