FTC Final Rule Banning Noncompete Provisions: Impact on Deferred Compensation Plans

Description

On May 7, 2024, the FTC published a final rule banning the use of noncompete clauses in the workplace with limited exceptions and requiring employers to refrain from enforcing most existing noncompete agreements. This has a significant impact on current executive compensation arrangements and deferred compensation plans.

The final rule effectively covers any person or business operating for profit within the FTC's jurisdiction and imposes a ban on new noncompete agreements covering a wide range of employment arrangements, due to the broad definition of "worker" under the final rule. The rule also invalidates all existing noncompete provisions except for those with "senior executives" who are narrowly defined in the rule. In addition, the FTC states that whether a given contractual provision constitutes a "noncompete" clause is a fact-specific inquiry. However, the FTC did not specifically address how the final rule will apply to other restrictive covenants, such as non-solicitation clauses or nondisclosure agreements.

Counsel must understand the impact the FTC final rule has on executive compensation arrangements and deferred compensation structures. Before the rule's effective date, employers will be required to provide written notice to current or former workers that their noncompete clause cannot be legally enforced and will not be enforced against the worker, subject to limited exceptions.

Listen as our expert panel discusses key provisions of the final rule impacting compensation structures, state law considerations, and what counsel and clients should be doing now to prepare for compliance despite legal challenges.