Non-Compete Contracts, Goodbye

It is estimated that 30 million workers, nearly one in five Americans, are subject to non-compete agreements, according to the Federal Trade Commission. Until recently, non-compete agreements have been a very normal practice in the workplace.  Non-competes tend to tie employees to a company and prevent them from taking a new job in a similar field or starting a new business. 

The Federal Trade Commission has been working on a Non-Compete Clause Rule, which they have named “The Final Rule,” at the Federal and State levels to propose a new ban on non-compete agreements.  This ban would prevent all future non-compete agreements from being issued. The Federal Trade Commission estimates voiding non-compete agreements would expand career opportunities, generate over 8,500 new businesses each year, raise worker wages, lower healthcare costs and boost innovation.

“The Final Rule” allows employers to maintain existing non-compete agreements with “senior executives,” (those with over $151,164 annual compensation and in a policy making position for the business) but bans an employer from entering into, or attempting to enter into, a non-compete clause with a senior executive after the effective date of “The Final Rule.”  In most cases, the rule is retroactive subject to some exceptions listed above.

With non-compete agreements leaving, companies may start looking for new ways to reward and retain their key employees at the company.  There are four common, long-term performance plans to provide employees an incentive to stay at or move to a company.  They include the following:

  • Nonqualified Deferred Compensation Plans: These plans are implemented to recruit, retain, and reward key employees to help reduce turnover.  Properly implemented plans motivate and financially reward employees to work towards a common company goal while retaining employees with a long-term outlook.
  • Equity: Equity can be either in the form of stock options or restricted shares and are found in most public companies. Private companies typically shy away from equity since ownership is generally reluctant to part with shares. Equity-based programs are typically based on meeting performance goals.
  • Phantom Stock: Because share equity is typically reserved for public companies, private companies may use Phantom Stock as its long-term incentive program. These plans pay out based on a valuation of the company at the start of the program, and later measured at a specific time. These payments are most often made in cash.
  • Performance Programs: These programs pay out to participants based on the performance of the company achieving their multi-year goals. Measures used for performance programs may include profit, revenue, market share, customer satisfaction, return to shareholders, or a variety of other assessments. These payments are also most often made in cash.

The non-compete agreement final ruling is expected to come in August 2024. “The Final Rule” was submitted on April 23, 2024, and should take effect 120 days after its publication in the Federal Register.  Although, this is expected to be delayed due to legal challenges.  As we approach August, it is a critical time to start exploring different options to retain and reward key employees in the upcoming year.  EBN welcomes an opportunity to help develop a long-term incentive plan that best fits your company’s needs.