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While a recent U.S. Federal Trade Commission rule barring employer-employee noncompete restrictions is expected to have far-reaching effects when it's rolled out in September, does that reach include employers who describe their organizations as nonprofits? The answer: maybe, maybe not. A lot depends on whether the employer is what the FTC says is "factually speaking" a nonprofit organization, according to the commission’s definitions.

Since the announcement of a sweeping rule change that bans noncompetes in nearly all employment types, including for PTs, PTAs, and their employers, questions have arisen as to whether those restrictions can be enforced in nonprofit organizations, which are ostensibly beyond the jurisdiction of the FTC. Those organizations include nonprofit hospitals and other health care facilities that employ PTs and PTAs.

According to the FTC, an organization's tax-exempt status alone — operating as a 501(c)3, for example — isn't enough to get around the noncompete ban. As explained by the commission, in order to be considered exempt, the organization must show both that there is "an adequate nexus between an organization’s activities and its alleged public purposes," and that its net income be "properly devoted to recognized public, rather than private, interests.” In other words,  the FTC will be looking at whether the organization is in business only for charitable purposes, and whether the organization is making a profit.

That two-part bar may present a challenge for at least some of the 58% of U.S. hospitals that currently claim tax-exempt status. In the FTC's eyes, practices such as pursuing strategies to maximize profits, securing multimillion dollar salaries for executives, and deploying aggressive collection tactics with low-income patients are likely to tip the balance toward being subject to the noncompete ban.

According to Andrew Amari, JD, APTA policy and payment specialist, FTC's approach means that PTs and PTAs working under noncompete restrictions imposed by a nonprofit may find that their employer is on less sure footing when it comes to enforcing those restrictions.

"Under the new rule, a hospital simply cannot know with certainty that their noncompete is enforceable," Amari said. "While it may be likely they meet the standards for an exemption, these can be challenged and the onus will be on the hospital to meet the two-prong test to enforce the noncompete in court and prove that they are, in fact, a nonprofit entity."

Amari believes that the FTC will look to establish some precedent in the courts to solidify its approach, but that even without the precedent, simply using tax-exempt status as a qualification for a noncompete exemption won't pass muster.

The new rule is set to take effect Sept. 4.


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