![]() ![]() POTENTIAL IMPACTS WITH EQUITY COMPENSATION It is unclear whether this would apply to executives who are no longer current workers at the time of the compliance date and who may be receiving severance or other benefits that were only provided as consideration for, or were part of a contract negotiated to include, a noncompete covenant. The proposal would become effective in connection with its compliance date, at which time it would apply to all “workers” and would prohibit maintaining any contract that includes a violative noncompete clause. One issue that may arise as a result of the proposal is whether any of the benefits provided as consideration for a noncompete covenant that is rescinded can be cancelled or forfeited under the contractual “frustration of purpose” doctrine. ![]() In many instances, these noncompete covenants were likely agreed to because executives were provided with significant incentive, retention, severance, or other compensation protections. As a result, companies would need to review all executive agreements to identify any violative restrictive covenants and provide notices to the covered executives. The proposal would require employers to rescind existing noncompete clauses by affirmative notification in connection with the final rule’s compliance date (and the proposed rule includes a safe harbor notice for this purpose). REQUIRED RESCISSION OF EXISTING NONCOMPETES It is unclear whether there would be an exception under the proposal for situations where an executive is paid not to compete (such as a “garden leave” provision). A nonexhaustive list of such arrangements includes offer letters, employment agreements, and services contracts equity or equity-based compensation plans and award agreements (see below for further thoughts on these arrangements) bonus and carried interest arrangements severance plans, policies, or agreements and certain transaction-based agreements such as equity cancellation agreements, change in control or retention bonuses, and temporary transition services agreements for executives of acquired businesses. The proposal would prohibit new contracts with executives that include noncompete clauses, which will fundamentally change the dynamics at play when companies negotiate arrangements in connection with hiring, promoting, or designing new incentives with key executives. As part of the rulemaking process, the FTC has specifically solicited comments on whether “senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban” and/or whether “low- and high-wage workers should be treated differently under the rule.” We discuss a brief sample of key impacts below, but aspects of the rule could change between the proposal and any final rule ultimately adopted by the FTC. Accordingly, the proposal, if adopted in its current form, could have far-reaching impacts on the agreements and arrangements that companies enter into with their C-suite and other key executives, as well as on other aspects of executive compensation. While President Biden’s earlier comments surrounding the 2021 executive order appeared to be focused on lower-level employees, the newly proposed rule defines “worker” in an expansive manner to include all employees as well as individuals classified as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer. See our LawFlashes discussing the proposal and frequently asked questions. The proposal was issued in response to President Joseph Biden’s Jexecutive order and related statements calling on the FTC to ban or limit employment contract restrictive covenants that restrict workers’ freedom to change jobs. The Federal Trade Commission (FTC) announced a notice of proposed rulemaking on January 5, 2023, that would ban employers from entering into or maintaining noncompete clauses with their workers. To embed, copy and paste the code into your website or blog: ![]() FTC’s Proposed Ban on Noncompete Clauses May Have Far-Reaching Implications for Executive Compensation ![]()
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