The Federal Trade Commission (FTC) has implemented new restrictions on noncompete agreements that could have a significant impact on family businesses and succession planning. Noncompete agreements are contracts that restrict employees from working for competitors or starting a competing business after leaving their current employer. These agreements can be very broad and restrictive, limiting employees’ ability to find other employment. The FTC believes these agreements are unfair methods of competition and has enacted new rules to ban them for most employees.
The FTC estimates that 18% of workers, or 30 million people, are currently bound by noncompete agreements. While only a small percentage of high-level employees are likely to be affected, for family businesses, the impact could be crucial. The FTC anticipates various benefits from the new restrictions, including increased compensation for employees and the formation of new businesses. However, the actual impact remains to be seen, and it may not align with the FTC’s projections.
The new FTC restrictions prohibit noncompete agreements for all workers, with existing agreements becoming unenforceable. Senior executives, defined as those earning over $151,164 in a policy-making position, have different restrictions. Existing noncompete agreements for senior executives can stay in force, but new agreements will not be allowed, potentially disrupting business succession plans. To mitigate the impact, a sale of business exception exempts noncompete agreements when selling a business interest or operating assets.
As the estate tax exemption is set to decrease, closely held family businesses are considering estate planning options. With the loss of noncompete, non-disclosure, and non-solicitation agreements, the value of businesses may be affected. Business owners must assess how these new rules will impact their succession planning efforts. While the FTC’s restrictions aim to better protect employees, the consequences for family businesses could be significant. Family business owners need to navigate these changes to ensure business continuation and successful succession planning.