Navigating Non-Competes: Considerations for Nonprofits Around the FTC Ban on Non-Compete Clause
The Federal Trade Commission’s rule banning non-compete clauses in employee contracts was set to become effective on September 4, 2024. However, as of this writing*, the ban remains in limbo, with the federal court for the Northern District of Texas ruling it unenforceable – for now.
While the FTC will likely appeal the Texas court’s decision, nonprofits can’t afford to wait to see what happens. It’s important for HR and hiring managers to understand the potential implications of the rule and how it might impact hiring and retention now so they can take steps to reduce their organization’s risk.
Non-compete Ban Basics
First and foremost, it’s critical to note that nonprofits are not automatically exempt** from the non-compete ban. While FTC rules typically only apply to for-profit entities, simply claiming tax-exempt status isn’t enough to exempt nonprofits in this case.
To be exempt, organizations must meet two specific parameters:
- The source of income must be strictly for charitable purposes.
Organizations must be focused ONLY on charitable goals. There can be no substantial profit-making endeavors that benefit private interests. Any organizations that aggressively pursue profit-maximizing strategies, pay executives exceptionally high salaries, or use aggressive collection tactics (particularly against low-income individuals) would be forbidden from using non-compete clauses. - The destination of income must be strictly for charitable purposes.
To be exempt from the ban, neither the organization nor its members can derive a profit from the organization’s activities. This includes excessive compensation, resources or earnings that improperly benefit individuals (like board members, officers or key employees), profit sharing, the use of organization funds for personal expenses or non-charitable purposes, and disguised profit distributions (such as overpaying for services provided by a company owned by a board member).
While any nonprofit organization could fail this two-part exemption test, the biggest risk is for healthcare. According to the American Medical Association, 35-45% of physicians are bound by noncompete clauses. Even if they work at an exempt hospital, many are employed by for-profit staffing agencies or physicians’ groups. Nonprofit hospitals are also more likely to engage in business practices similar to for-profit entities, such as collection tactics, high executive salaries, and revenue generation.
Potential Benefits of the Ban
A ban on noncompete clauses obviously poses some risks, namely, making it much easier for employees to leave, therefore jeopardizing retention. But it’s not all bad, even for nonprofits in the healthcare sector.
A ban could make it easier for nonprofits to attract talent from for-profit companies that can no longer enforce their noncompete clauses. In addition, the freedom to move between employers can increase the quantity and quality of the available talent pool, giving nonprofits access to skills and talent they may have never been able to access before. Without noncompete clauses restricting their choices, talent would be free to pursue mission-driven work that aligns with their values.
Blueprint for Potential Ban Readiness
While we wait for the FTC to appeal the decision to block enforcement of the non-compete clause rule, there are some steps nonprofits might take to avoid being blindsided by a talent exodus:
- Determine exemption status.
Work with your HR, finance, administrative and auditing teams to determine whether you meet the requirements for exemption based on the FTC’s two-part test.
- Review existing contracts.
Audit your existing employee contracts for noncompete agreements. If the rule becomes enforceable, some noncompete agreements for senior executives may be enforceable even for otherwise exempt organizations.
- Prioritize company culture.
The best way to maximize retention under any circumstances is to create a work environment that no one wants to leave. Re-evaluate your compensation, working conditions, pay transparency and benefits to ensure you’re offering incentives to stay, rather than relying only on restrictions on leaving.
- Beef up onboarding and development.
Create stronger onboarding and offer ample training and growth opportunities to bolster employee loyalty and reduce turnover.
- Consider other methods to protect proprietary information.
Intellectual property protection is often the primary motivator behind non-compete clauses. If those become prohibited, consider non-solicitation and confidentiality agreements as alternatives. Just be careful that these aren’t structured so broadly that they function as a noncompete agreement.
Ultimately, a noncompete clause shouldn’t be the only reason your employees want to stay. Regardless of the FTC rule, nonprofits should always strive to attract mission-driven talent, provide a meaningful purpose for their team, and create an engaging and rewarding environment so no one wants to leave, even if they’re free to do so.
*As of publish date September 23, 2024
**Always consult your attorney to determine compliance, exemption status and applicability for any regulatory rule.
