Navigating the FTC’s Noncompete Ban: Impact on Employee Benefits and Compensation

The FTC’s recent ban on noncompetes could significantly affect various aspects of employee benefits and executive compensation plans. Although the rule is set to take effect on September 4, 2024, a federal district court in Texas has temporarily suspended its enforcement pending a final ruling on the merits by August 30, 2024. Here are some key points:

Code Section 457(f) Plans:

• Tax-exempt employers that sponsor Code Section 457(f) plans (a type of nonqualified deferred compensation plan) may need to make changes.
• Existing guidance treats certain enforceable noncompetes as a substantial risk of forfeiture, delaying income recognition until payment. If the ban becomes effective, deferred amounts tied to noncompetes may become taxable earlier.
• Revising these plans to maintain tax-deferred status could be complicated due to differences with Code Section 409A.

Restricted Stock:

• Currently, noncompetes can create a substantial risk of forfeiture under Code Section 83 (which governs the timing of taxation of restricted property).
• If the substantial risk of forfeiture lapses due to noncompliance with a noncompete, taxation occurs. However, recipients can opt for an 83(b) election to include the fair market value in income on the grant date.
• The ban may impact the timing of taxation for restricted stock.

Severance Arrangements and Golden Parachutes:

• Employers should assess how noncompetes affect severance arrangements and golden parachute payments.
• If noncompetes are invalidated, these arrangements may need adjustments.

Garden Leave:

• Garden leave provisions, which require employees to remain on payroll during a notice period, may be impacted.
• Employers should review their garden leave policies in light of the ban.

Employers should evaluate their existing plans and compensation arrangements that utilize non-competes to ensure compliance and anticipate potential impacts if noncompetes become invalid. 

6 Steps Employers Could Take to Adapt to the FTC’s Ban on Non-competes:

1. Review Existing Agreements:

Employers should assess their current employment agreements, noncompete clauses, and executive compensation plans.

Identify any provisions that rely on noncompetes and evaluate their impact.

2. Alternative Protections:

Consider alternative ways to protect legitimate business interests without relying solely on noncompetes.

Confidentiality agreements trade secret protections, and nonsolicitation clauses can offer similar safeguards.

3. Rewrite Noncompete Clauses:

If noncompetes are a critical part of existing agreements, consider revising them.

Narrow the scope, duration, and geographic reach of noncompetes to comply with potential changes in regulations.

4. Educate Employees:

Inform employees about the evolving legal landscape.

Explain the impact of the ban on noncompetes and any adjustments made to existing agreements.

5. Consult Legal Counsel:

Seek advice from legal professionals who specialize in employment law.

Ensure that any modifications to agreements are legally sound and aligned with best practices.

6. Update Compensation Plans:

Review executive compensation arrangements, including golden parachutes and severance agreements.

Adjust plans to account for potential changes in noncompete enforceability.

Remember, each organization’s situation is unique, so consulting legal experts is crucial. Adaptation will require a thoughtful approach that balances business needs, employee rights, and compliance with evolving regulations.

Noncompetes Potential Risks for Employers:

1. Talent Drain: Overly restrictive noncompete agreements may discourage talented employees from joining or staying with a company. Employees might choose to work elsewhere to avoid limitations on their future job prospects.
2. Litigation Costs: Enforcing noncompetes can lead to legal battles. Employers may need to sue former employees who violate the agreements, incurring legal fees and potential reputational damage.
3. Employee Morale: Employees who feel trapped by noncompetes may become disengaged or resentful. This can impact productivity, teamwork, and overall morale within the organization.
4. Innovation Stifling: Noncompetes can hinder innovation. Employees may avoid pursuing new ideas or entrepreneurial ventures due to fear of violating their agreements.
5. Market Competition: Restrictive noncompetes limit the movement of talent across companies. This can reduce overall competition in the job market and potentially harm industry growth.
6. Negative Public Perception: Companies perceived as overly aggressive in enforcing noncompetes may face backlash from the public, potential customers, and investors.

Balancing the protection of legitimate business interests with employee rights is essential. Employers should carefully consider the necessity and scope of noncompetes to mitigate these risks. 

How PEOs Can Help?

Professional Employer Organizations (PEOs) provide comprehensive HR solutions to businesses. By partnering with a PEO, companies can outsource critical HR functions such as payroll, benefits administration, compliance, and risk management. 

1. Educating Employers:

PEOs play a crucial role in keeping employers informed about regulatory changes. They can help businesses understand the implications of the FTC’s noncompete ban.

Employers need to know that existing noncompetes for most workers will no longer be enforceable after the rule’s effective date. PEOs can guide employers through this transition.

2. Reviewing Existing Agreements:

PEOs assist in evaluating current employment contracts and identifying noncompete clauses.

If your business has existing noncompetes, PEOs can help you determine which ones are affected by the ban and provide guidance on compliance.

3. Employee Communication:

PEOs can help employers communicate with workers who previously signed noncompetes.

Employers must notify these workers that their noncompete clauses will not be enforced against them. PEOs can facilitate this communication.

4. Adapting Compensation and Benefits:

PEOs work with employers to adjust compensation plans and benefits to align with the new rules.

They can help design alternative protections (such as confidentiality agreements) to safeguard business interests without relying solely on noncompetes.

5. Legal Compliance:

PEOs collaborate with legal experts to ensure that employers remain compliant.

They stay updated on any further developments related to noncompetes and provide timely advice.

Take Action:

If you’re an employer, consult with your PEO to navigate the changing landscape. Ensure that your business adapts smoothly while respecting workers’ rights. Remember, PEOs are your partners in compliance and growth.

With over 600 PEO companies, how do you choose? As your dedicated PEO broker, we take a holistic approach to finding the right PEO partner for your business, helping you maximize your savings potential and avoid any undue risks.

Ready to optimize your worker's comp, and employee benefit plans and streamline your HR processes? Contact Suzanna@PEOfortheCEO.com today for personalized assistance or schedule a chat with us.

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