FTC Non-Compete Ban: Implications for Executive Compensation

As previously reported, the FTC has released a proposal to ban non-compete agreements for all employees and independent contractors, with no exceptions except in cases between a buyer and seller of a business. A recent Morgan Lewis blog approaches the proposal from an executive compensation perspective and adds several important items to consider:

• Companies should take a good look at the (long) list of arrangements in which non-competes may be found, including offer letters, employment agreements, equity plans/award agreements severance plans, change in control agreements and transition plans for executives in an acquisition. All of these would need to be revised in the event the ban came to pass.
  
  
• The ban requires the rescission of all existing non-competes, including for terminated executives who have already received consideration such as severance or equity vesting.
  
  
• The ban may implicate “excess parachute payments” in the event of a change in control. Under Section 280G, there is no deductibility for excess parachute payments and executives receiving them are subject to a 20% excise tax penalty. However, if the payments are consideration for services to be provided post change-in-control, including an agreement not to compete, then they are exempt from treatment a parachute payment. If non-competes go away, this exemption is no longer available.
  
  
• To the extent that non-competes provide a “substantial risk of forfeiture” to deferred compensation for purposes of delaying FICA tax, the removal of non-competes could remove this risk and change the timing of the tax.

It is not entirely clear whether executives would be expected to pay back consideration they received as part of a non-compete once that non-compete is no longer valid (such as in a severance agreement). Jackson Lewis had this to say: “Depending on the specific language of the applicable agreement or plan, the rescission would have no bearing on bargained-for benefits negotiated in consideration for the non-compete clause…base compensation, incentive compensation, deferred compensation, or even consideration in connection with the sale of a business...”