On April 23, 2024, the Federal Commerce Fee (“FTC”) issued its Remaining Rule banning employers from imposing post-employment noncompete necessities on their employees (the “Remaining Rule”). The FTC has indicated that it’s going to proceed to prioritize enforcement within the healthcare business, with goals seeming to incorporate assuaging doctor shortages and enhancing entry to healthcare. What the Remaining Rule means for healthcare organizations usually, and for nonprofits specifically, is just not completely clear and is more likely to be challenged.
Concentrate on Healthcare
The FTC obtained tens of 1000’s of feedback on the proposed rule and claims that 25,000 of the 26,000 feedback obtained supported a ban on noncompetes. The FTC famous that commenters who addressed the results of non-competes on product high quality and client selection primarily mentioned the healthcare business, attributing doctor shortages throughout the nation and adverse impacts on high quality of care and affected person selection partly on the prevalence of noncompetes within the business. The FTC has made clear that the healthcare supplier house will proceed be a precedence for enforcement of the rule, estimating that the Remaining Rule will scale back spending on doctor companies over ten years by $74-194 billion in current discounted worth, will lead to 1000’s to tens of 1000’s of further patents per yr, and can enhance within the charge of latest agency formation by 2.7%.
FTC Jurisdiction over Nonprofits
The Remaining Rule acknowledges that the FTC’s jurisdiction underneath the FTC Act usually doesn’t cowl tax-exempt organizations, which the FTC notes contains 58% of hospitals within the U.S. Nonetheless, the Remaining Rule explains that tax-exempt organizations “usually are not categorically past the Fee’s jurisdiction” and appears to mirror that the FTC may problem whether or not a nonprofit is in reality a profit-making enterprise and thus throughout the FTC’s jurisdiction.
The attain of the Remaining Rule can not exceed the FTC’s authority underneath the FTC Act, which offers that the FTC is “empowered and directed to forestall individuals, partnerships, or companies” from partaking in unfair strategies of competitors, and defines companies as an entity “organized to hold on enterprise for its personal revenue or that of its members.” (15 U.S.C. § 44.)
That stated, the scope of the FTC’s jurisdiction is just not completely clear, and an entity’s having Federal earnings tax-exempt standing underneath 501(c) of the Inner Income Code could not put it exterior of the bounds of the FTC’s jurisdiction. Accordingly, the FTC tried to make clear this problem within the Remaining Rule, stating that: “To dispel this misunderstanding, the Fee summarizes the prevailing legislation pertaining to its jurisdiction over non-profits.”
The Remaining Rule explains that, based mostly on judicial selections and FTC precedent, the FTC applies a 2-part check to find out if a company is organized for revenue and thus throughout the FTC’s jurisdiction, requiring: (1) that there be an sufficient nexus between a corporation’s actions and its alleged public functions; and (2) that its web proceeds be correctly dedicated to acknowledged public, somewhat than personal, pursuits. The FTC seems to each “the supply of the earnings, i.e., as to if the company is organized for and truly engaged in enterprise for under charitable functions, and to the vacation spot of the earnings, i.e., as to if both the company or its members derive a revenue.”
Though the Remaining Rule displays that whereas a dedication by the Inner Income Service (“IRS”) {that a} nonprofit doesn’t qualify for tax exemption is significant to the FTC’s evaluation of whether or not that entity is topic to FTC oversight, the FTC’s evaluation is separate and distinct. The Remaining Rule states tax-exempt standing is one issue to be thought of however doesn’t preclude inquiry into an entity’s operations and objectives, citing associated precedent.
The Remaining Rule describes that FTC and IRS precedent have recognized “personal advantages that, if provided, may render an entity a company organized for its personal revenue or that of its members underneath the FTC Act, bringing it throughout the Fee’s jurisdiction.” The Remaining Rule cites examples of entities over which the FTC exercised jurisdiction, together with:
- A physician-hospital group consisting of over 100 personal physicians and one non-profit hospital, as a result of it engaged in enterprise on behalf of for-profit doctor members.
- A tax-exempt impartial doctor affiliation that consisted of personal, impartial physicians and personal, small group practices, as a result of it was organized for the pecuniary advantage of its for-profit members and contracted with payors, on behalf of its for-profit doctor members, for the supply of doctor companies for a charge.
- Entities which have had their tax-exempt standing revoked by the IRS on the idea of ceding efficient management to a for-profit associate and conferring impermissible personal advantages, and paying unreasonable compensation, together with percentage-based compensation, to insiders.
The FTC seems to view its oversight of nonprofits that don’t meet the necessities to be exempt from FTC oversight as according to an rising public scrutiny of tax-exempt hospitals. The Remaining Rule notes that:
“Private and non-private research and studies reveal that some such hospitals are working to maximise earnings, paying multi-million-dollar salaries to executives, deploying aggressive assortment ways with low-income sufferers, and spending much less on group advantages than they obtain in tax exemptions. Financial research by FTC workers reveal that these hospitals can and do train market energy and lift costs much like for-profit hospitals.”
Quasi-Public Entities
Likewise, the Remaining Rule displays that it could apply to quasi-public entities or personal entities that associate with states or localities, resembling hospitals affiliated with or run in collaboration with states or localities, relying on whether or not the actual entity or motion is an act of the state itself and due to this fact exempt from the operation of federal antitrust legal guidelines underneath the so-called “State Motion Doctrine,” which requires a fact-specific inquiry into the group and operation of the entity.
What the Remaining Rule Requires
The Remaining Rule offers that an employer could not enter post-employment noncompetes with its employees after the rule’s efficient date (which is more likely to be in early September 2024). The Remaining Rule defines a “noncompete” as any time period or situation of employment that “prohibits a employee from, penalizes a employee for, or capabilities to forestall a employee from (1) searching for or accepting work in the USA with a distinct particular person the place such work would start after the conclusion of the employment that features the time period or situation; or (2) working a enterprise in the USA after the conclusion of employment that features the time period or situation.” Doing so would violate Part 5 of the FTC Act, and the noncompetes might be unenforceable. Present noncompetes (i.e., these entered previous to the rule’s efficient date) are additionally unenforceable after the efficient date with very restricted exception. The Remaining Rule defines “employee” broadly—which means any “one that works or who beforehand labored, whether or not paid or unpaid, with out regard to the employee’s title or the employee’s standing underneath every other State or Federal legal guidelines, together with, however not restricted to, whether or not the employee is an worker [or] impartial contractor.”
There aren’t any carve-outs from the Remaining Rule for healthcare suppliers, and prohibited noncompetes will embrace phrases and situations that require an worker to pay a penalty for searching for or accepting different work or beginning a enterprise after their employment ends, resembling by way of liquidated damages or cost-sharing provisions widespread in doctor and different supplier agreements in sure states. The Remaining Rule additionally prohibits provisions which require forfeiture of compensation within the occasion of post-employment aggressive exercise and comparable varieties of preparations.
Exceptions
There are just a few noteworthy exceptions to the Remaining Rule’s prohibition on noncompetes. Beneath the Remaining Rule, present noncompetes (i.e., these in impact previous to the Remaining Rule’s efficient date) can stay in drive with senior executives (outlined as employees incomes greater than $151,164 yearly who’re in “policy-making positions”). Companions in a enterprise, resembling doctor companions of an impartial doctor follow, usually will qualify as senior executives if the companions meet the compensation threshold and have closing authority to make coverage selections about “important features of the enterprise.” In distinction, a doctor who works inside a hospital system, at the same time as a division head, however doesn’t have policymaking authority over the group as a complete, wouldn’t qualify.
The Remaining Rule additionally carves out noncompetes entered in reference to the bona fide sale of a enterprise or an individual’s possession curiosity in a enterprise entity. The FTC famous within the Remaining Rule that such doctor companions would probably fall underneath the sale of enterprise exception in if the associate leaves the follow and sells their shares of the follow.
Lastly, the Remaining Rule’s necessities “don’t apply the place a reason behind motion associated to a noncompete clause accrued previous to the efficient date,” shielding ongoing litigation from rapid implications of the Remaining Rule.
To adjust to the Remaining Rule, employers should present discover to employees that the employer won’t implement noncompetes in place when the rule takes impact, and the Remaining Rule contains mannequin notification language to help compliance.
Subsequent Steps / Assets
- Monitor developments. Responses to the Remaining Rule have been heated, and the Remaining Rule is anticipated to be challenged in court docket. We anticipate specific scrutiny of the Remaining Rule’s utility to nonprofits.
- For tax-exempt organizations, concentrate on hot-button tax compliance points. As mirrored within the Remaining Rule, the FTC’s concentrate on nonprofit hospitals is happening inside a broader heightened scrutiny of nonprofit well being programs by authorities regulators and the press by way of how their monetary help and invoice assortment efforts evaluate to their for-profit opponents and whether or not the advantages they supply to the group are commensurate with the dear privilege of their tax exemption. Potential FTC scrutiny is now but another excuse for healthcare nonprofits to concentrate on compliance within the following areas – and to strategically spotlight their compliance publicly, together with on their IRS Kind 990 (which are sometimes appeared to by authorities regulators, the press and donors):
- Monetary help, charity care and billing and assortment insurance policies for sufferers – and compliance with the associated Part 501(r) necessities for tax-exempt hospitals (which the IRS additionally lately recognized as a key compliance precedence).
- Govt compensation – making certain that govt compensation is inside honest market worth, and ideally decided in accordance with nonprofit greatest practices.
- Joint ventures with for-profits – concentrate on IRS steerage for shielding tax-exempt standing on this context, notably given the FTC’s reference to this matter within the Remaining Rule.
- For nonprofit well being programs, concentrate on taxable associates. Many nonprofit well being programs have taxable subsidiaries that will not qualify for the nonprofit exclusion from the FTC’s jurisdiction.
- Be a part of our webinar on Could 7th. Sheppard Mullin’s Antitrust and Labor & Employment legal professionals issued a previous alert about this ruling right here and are internet hosting a webinar on Could 7, 2024 to supply a factual evaluation and key takeaways for contacts of the agency. Please be a part of us for extra data on how the Remaining Rule could influence your small business and contemplated transactions.