April 24, 2024

Please see below details on the Federal Trade Commission’s (FTC) final rule (issued yesterday, April 23, 2024) banning non-compete agreements.  Please note, this is not a legal analysis and we recommend you consult with your labor attorney for impacts on your company or not-for-profit entity.  Also, it should be noted that business groups led by the US Chamber of Commerce sued the Federal Trade Commission today seeking to block the finalized rule.  The FTC voted 3-2 along party lines to issue the rule banning non-competes in nearly all cases. The agency’s two Republicans dissented, adopting arguments similar to the business group that the FTC lacks clear congressional authority to write rules.  Democrats argued that the law explicitly allows the FTC to prohibit unfair methods of competition while another provision authorizes the agency “to make rules and regulations for the purpose of carrying out the provisions of” the law. Taken together, those provisions permit the FTC to issue rules defining unfair conduct, they say, citing a 1973 case that upheld the agency’s rulemaking authority. 

More About The Rule 
The rule provides that non-competes are an unfair method of competition and makes it unlawful for employers to enter into non-compete clauses with workers, including senior executives, or enforce currently existing non-compete clauses with a worker, except for pre-existing agreements with senior executives. The rule also requires that employers send notice to impacted current and former employees that they are no longer bound by existing noncompetes. The final rule will take effect 120 days after its publication in the Federal Register, however this likely will be delayed by legal challenges.

Senior executives with existing non-competes, allowed to remain in force under the rule, means a worker who was in a policy-making position when the non-compete was executed and received total annual compensation of at least $151,164 in the preceding year. A policy-making position is defined as an entity’s president, chief executive officer/equivalent, any other officer of a business entity who has a policy-making authority, and any other person with policy-making authority for the entity similar to an officer. Policy-making authority is defined in the final rule as final authority to make policy decisions that control significant aspects of a business entity or common enterprise. Additionally, the final rule does not apply for non-competes entered into in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

In the final rule, on page 50, the FTC addresses comments received during the public comment period from healthcare organizations regarding not-for-profits being outside the FTC’s authority. The FTC dispels this, stating that “under existing law, these organizations are not categorically beyond the Commission’s jurisdiction.” They cite examples of FTC precedent and judicial decisions showing that not all entities claiming tax-exempt status as nonprofits fall outside of the FTC’s jurisdiction. They specifically highlight cases in which the FTC exercised jurisdiction over a physician-hospital organization and an independent physician association.

It is explained in the final rule on page 52 that the FTC applies a two-part test to determine whether a corporation is organized for profit and thus within the Commission’s jurisdiction; there must be both an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interest. 

Further, importantly, they add that: 

• Quasi-public entities or certain private entities that partner with State or localities, such as hospitals affiliated with or run in collaboration with States or localities, may fall under the FTC’s jurisdiction depending on whether the particular entity or action is an act of the State itself under the State action doctrine.
• Additionally, some portion of the 58% of hospital systems nationwide that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals likely fall under the Commission’s jurisdiction and the final rule’s purview.
• FTC notes that many healthcare workers working at excluded hospitals will benefit from this rule because it applies to their employer – the staffing agency or for-profit physician group.

Ultimately, if entities claiming tax-exempt status are in fact profit-making enterprises based on their actual operations and goals, those 501(c) tax-exempt entities are covered by the final rule. While hospitals and healthcare entities claiming tax-exempt status as nonprofits do not necessarily fall outside the FTC’s jurisdiction, the FTC’s ban on non-compete agreements does not apply to hospitals and healthcare entities that are true “nonprofits.”

We expect further analyses to be coming out that we will share, in the meantime please let us know if you have any questions.