The Federal Trade Commission voted to ban noncompete clauses for most U.S. workers April 23. The rule would make it illegal to include noncompetes in employment contracts unless the employer is a nonprofit, as the FTC's jurisdiction does not generally cover tax-exempt organizations, according to an article by law firm Sheppard, Mullin, Richter & Hampton published April 30 in National Law Review.
Hospitals include around 58% of hospitals, according to the FTC, but the final rule made it clear that tax-exempt organizations "are not categorically beyond the Commission's jurisdiction," according to the report.
This "seems to reflect that the FTC could challenge whether a nonprofit is in fact a profit-making enterprise and thus within the FTC's jurisdiction," the article said.
Under the FTC act, the final rule cannot exceed the FTC's authority to prevent people, partnerships or corporations, which are defined as organizations carrying on business for its own profit, from engaging in unfair methods of competition. But the scope of the FTC's jurisdiction is not entirely clear, according to the article, which added that "an entity having Federal income tax-exempt status under 501(c) of the Internal Revenue Code may not put it outside of the bounds of the FTC’s jurisdiction."
The final rule explains the FTC's two-part test to determine if a corporation is organized for profit. There must be an "adequate nexus between an organization’s activities and its alleged public purposes" and net proceeds must be devoted to public interests, looking to both the source of income and the destination of the income.
The final rule also explains that the IRS' determination that a nonprofit does not qualify for a tax exemption is meaningful to oversight. The FTC's analysis is separate, adding that there are "private benefits that, if offered, could render an entity a corporation organized for its own profit or that of its members under the FTC Act, bringing it within the Commission's jurisdiction."
The FTC included several examples, such as a physician-hospital organization made up of more than 100 private physicians and a nonprofit hospital, as it engages in businesses on behalf of physician members.