FTC Potential Ban On Non-Competition Agreements And IRC Section 280G

If the Federal Trade Commission's proposal to ban most companies from using/enforcing non-competition agreements is finalized, this could have a significant effect relative to the tax treatment of golden parachute payments pursuant to Internal Revenue Code Sections 280G and 4999. In change of control situation for public companies, a non-competition agreement is sometimes used as a tax-mitigating alternative. Any portion of a parachute payment that is supportably attributed to the fair market value of a non-competition agreement can be treated as reasonable compensation and hence excluded from the parachute payment for the purpose of measuring whether or not the parachute payment exceeds the safe harbor limit. Therefore, removing non-competition agreements from the golden parachute equation could bring about changes in how these arrangements are structured.