The FTC is proposing dramatic changes to 'non-competes'. How will this affect your client’s Deferred Compensation, Key Man, and Buy-Sell arrangements?
Introduction
Non-compete agreements have long been a common feature in employment contracts. They are designed to protect businesses from unfair competition by preventing employees from working for competitors or starting similar businesses for a specified period after leaving a job. However, the Federal Trade Commission (FTC) has recently proposed significant changes to the legality and enforceability of non-compete clauses. These changes could have far-reaching implications for both employers and employees. In this blog, we'll explore the key aspects of the FTC's proposed changes and what they could mean for the non-competes that are part of many SERPS, Deferred Compensation, Key Person, and Buy Sell arrangements funded by Life Insurance.
1. Understanding the FTC's Proposed Ban
In January 2024, the FTC proposed a rule that would effectively ban most non-compete agreements nationwide. This move is part of a broader effort to promote fair competition and economic mobility. The FTC's rationale is that non-compete agreements often limit workers' ability to seek better job opportunities, negotiate higher wages, and innovate. By restricting non-competes, the FTC aims to enhance worker freedom and stimulate a more dynamic labor market.
2. Who Will Be Affected?
The proposed rule could impact a wide range of industries and professions. Traditionally, non-compete agreements have become more common in high-skill industries, such as technology, healthcare, and finance. However, they have increasingly been used in low-wage jobs, such as retail and service industries, in recent years. The FTC's rule would apply across the board, affecting millions of workers and employers.
3. Key Provisions of the Proposed Rule
Ban on New Non-Competes
If the rule is implemented, employers would be prohibited from entering into new non-compete agreements with employees. This ban would apply to all employees, regardless of their position or pay level.
Rescission of Existing Non-Competes:
Employers would be required to rescind any existing non-compete agreements. The rule would also mandate that employers notify current and former employees that their non-compete agreements are no longer in effect.
Exception for Senior Executives
It allows employers to maintain existing non-competes with senior executives (over $151,164 annual comp and in a policy-making position) but bars future non-competes for senior executives after the effective date of the Final Rule.
Exception for the Bona Fide Sale of a Business Entity
Allows non-compete clauses where there is a bona fide sale of the business entity or of the person's ownership interest in an entity. However, this exception is narrowly defined and would not apply to most employment situations.
4. Potential Impact on Employers
The proposed changes could significantly change employers' protection of business interests. Companies that have relied on non-compete agreements to safeguard trade secrets, client relationships, and proprietary information may need to explore alternative methods, such as non-disclosure agreements (NDAs) and non-solicitation agreements, which would remain legal under the proposed rule.
5. Potential Benefits for Employees:
The FTC's proposed rule is expected to affect employees positively. Without the constraints of non-compete agreements, the FTC contends that workers would have greater freedom to pursue new job opportunities, potentially leading to higher wages, better working conditions, and increased job satisfaction. Additionally, they believe the rule could foster greater innovation and entrepreneurship, as workers would have more flexibility to start their businesses or join startups.
6. What's Next?
The proposed rule is due to take effect on September 4, 2024. However, several legal challenges could delay its implementation. For example, the United States District Court for the Northern District of Texas granted motions for a preliminary injunction to prevent the FTC's rule from being enacted. It's currently unclear whether this will be a complete stay or apply only to the plaintiffs in the specific case. The court has indicated it will issue a final order on August 30, 2024. This is only one of many current legal challenges. Stay tuned for updated information.
Conclusion
The FTC's proposed changes to non-compete agreements represent a significant shift in labor policy, potentially reshaping the employment landscape in the United States. While the rule is not yet final, employers and employees must stay informed about the developments and prepare for the possible implications. Since the non-compete is a part of many life insurance-funded plans, many business clients and their employees will likely be somewhat impacted.
Next steps: What is the best way to navigate the changes for maximum value for both your business clients and their employees?
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