The Federal Trade Commission (FTC) has approved a ban on employment non-compete restrictions across most sectors of the economy including healthcare. The rule is set to take effect Sept. 4.
Implementation of the rule could still be delayed by legal challenges, including a federal lawsuit by the U.S. Chamber of Commerce in which it accuses the FTC of overstepping its authority.
However, nonprofit leaders in healthcare should begin reviewing their employment contracts and policies now to determine how the rule could affect them. Though the FTC’s jurisdiction technically doesn’t apply to nonprofits, “courts have found that merely claiming tax-exempt status as a nonprofit is not enough to place an entity outside the FTC’s jurisdiction,” Victoria Graham, an FTC spokesperson, told The NonProfit Times.
The key test, according to legal experts, will be whether a given nonprofit is operating exclusively for charitable purposes and not for anyone’s private benefit. Red flags such as substantial amounts of unrelated business income or executive compensation that regulators deem excessive could all invite unwanted scrutiny. The growing number of hybrid operating partnerships that nonprofit hospitals have entered with for-profit physician practices in recent years, often with financing by private equity groups, could be an invitation to further scrutiny as well.
One thing is clear: If the FTC’s noncompete ban is upheld, employment and recruiting practices at the roughly 3,000 nonprofit hospitals across the United States will be significantly impacted. Under the rule, existing noncompetes for senior executives with policymaking authority earning at least $151,164 would be allowed to remain in effect. However, all other noncompetes would be rescinded and new ones for all employees including senior executives and independent contractors would be prohibited.
The extent to which noncompetes are used in healthcare is still a matter of some dispute. Colin Milligan, a spokesman for the American Hospital Association (AHA), told The NonProfit Times they are used “only for senior executives and certain doctors.” However, physician groups argue the use of noncompetes has expanded dramatically during the past 10 to 15 years to include nearly all doctors as well as others who work in healthcare. Hospital mergers and consolidation have further constricted the ability of healthcare professionals to change jobs, which many say has the effect of forcing them not just to leave their communities but to leave their states when seeking other employment. Critics argue this has a direct impact on patient care especially in rural and underserved communities.
Even if the FTC’s noncompete ban is delayed or struck down at the federal level, nonprofit healthcare organizations could still face similar restrictions at the state level. Four states – California, Minnesota, North Dakota, and Oklahoma – have enacted legislation banning all or most noncompetes. Legislatures in nearly 30 other states have enacted or are considering partial bans as well.
This evolving legal landscape makes it incumbent on nonprofit healthcare leaders to examine their activities including joint ventures with for-profits to ensure appropriate safeguards are in place. Executive compensation should also be reviewed to ensure it is reasonable and approved in accordance with a conflict-of-interest policy.
“These are things you can do now to mitigate the FTC’s private and excess benefit concerns, and many of them are things the nonprofit world should be observing anyway,” said Jacob Zerkle, an attorney with the Polsinelli Law Firm’s office in Chicago who advises charities and nonprofits.
In the meantime, the FTC appears fully intent on enforcing the new rule and defending it in court. “Our legal authority is crystal clear,” Graham said. “Congress specifically empowered and directed the FTC to prevent unfair methods of competition… Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate and we look forward to winning in court.”
