The Federal Trade Commission (FTC) has introduced new restrictions on noncompete agreements, which could have a significant impact on estate planning for closely held family businesses. Noncompete agreements are contracts that restrict employees from accepting new employment or starting a competing business after leaving their current employer. These agreements can be broad and restrictive, limiting employees’ ability to secure new employment elsewhere and potentially hindering business succession planning.
The FTC estimates that around 30 million workers, or 18% of the workforce, are currently bound by noncompete agreements. While the new restrictions aim to provide benefits such as increased innovation, compensation, and reduced healthcare costs, the actual impact remains to be seen. The restrictions will apply to all workers, invalidating existing noncompete agreements for most employees, including senior executives earning over $151,164 in a policy-making position.
For family businesses planning succession, the new rules could pose challenges in retaining key employees essential for the transition to the next generation. Noncompete agreements that were part of compensation packages aimed at safeguarding critical business knowledge and skills may no longer be enforceable under the FTC regulations. This could disrupt succession plans and force businesses to reconsider how to retain crucial employees without the use of noncompete agreements.
An exception to the noncompete restrictions exists for the sale of business interests, allowing employees to escape the constraints of noncompete agreements when selling their business interests in a real or bona fide sale. However, the application of this exception to family businesses and their succession plans remains unclear, as it may require employees to purchase equity in the company, which could complicate control and non-compete provisions.
In addition to the prohibition of noncompete agreements, the FTC has imposed notice requirements on employers to inform employees that existing noncompete agreements will not be enforceable. This comprehensive approach aims to ensure affected employees are aware of their rights and protections under the new regulations. As estate, gift, and GST exemptions are set to reduce by half at the end of 2025, business owners should consider the potential impact of these changes on business valuation and estate planning strategies.
In conclusion, while the FTC’s restrictions on noncompete agreements may benefit employees, it could have a negative impact on closely held family businesses and their succession planning efforts. Business owners are advised to review and revise their business succession plans to adapt to the new regulations and evaluate alternative strategies for retaining key employees without the use of noncompete agreements. Monitoring the ongoing developments and legal challenges related to these new restrictions will be crucial for businesses seeking to preserve their legacy and transition to the next generation effectively.
