In a move that's set to reshape the landscape of mergers and acquisitions (M&A), the Federal Trade Commission (FTC) recently decided to ban noncompete agreements, an act that has sent ripples through the corporate world. Traditionally, noncompete clauses had been a staple in mitigating risks associated with M&A activities, especially concerning the retention of key personnel and preventing them from becoming direct competitors shortly after transactions. However, this regulatory shift will necessitate a reevaluation of risk management strategies and garden leave structures — which may require employees to stay away from the workplace after termination while being compensated — are emerging as a viable alternative to safeguard business interests during critical transition periods.
What's the Impact?
The FTC's ruling to outlaw noncompete agreements marks a significant pivot in how businesses approach change control and risk mitigation in M&A scenarios. Noncompete clauses have long served as a protective measure, ensuring that the value of the acquired entity isn't eroded by the departure of crucial talent who possess intimate knowledge of operations, strategies and customer relationships. Additionally, under the new rules, non-solicit and nondisclosure agreements are not explicitly banned, but those that are so broad they function like noncompete agreements and prevent employees from accepting new work are not allowed.1 The absence of these mechanisms will challenge companies to find innovative solutions to retain their competitive edge and ensure the smooth integration of acquired assets.2
The Role of Garden Leave Structures
Left relatively untouched by the FTC's new rules, garden leave agreements present a compelling solution to this new regulatory environment. Under a garden leave arrangement, employees are paid a portion of their compensation during a stipulated period post-resignation or post-acquisition, during which they are not required to work but are also restricted from joining a competitor. This period allows companies to manage transitions more effectively, safeguard sensitive information and prevent the immediate transfer of competitive advantages to rivals.
What Are the Benefits of Garden Leave?
- Transition Assistance: Unlike traditional noncompete agreements, garden leave can provide a framework for outgoing employees that assists with the post-acquisition transition by sharing critical knowledge and insights that can help onboard successors or integrate teams more seamlessly.
- Protection of Sensitive Information: By keeping employees on the payroll, companies can better control access to confidential data, ensuring that trade secrets remain secure during the transition period.
- Alignment of Interests: Given their continued compensation and potential involvement in supporting the transition, departing employees remain incentivized to act in the best interest of the company.
- Legal and Ethical Compliance: In the wake of the FTC ban, garden leave offers a compliant alternative to noncompete agreements, minimizing legal risks while still protecting the company's interests.
A Tried-and-True Method
The concept of garden leave is more familiar in jurisdictions outside the United States, with countries like the U.K. having a long history of utilizing such arrangements effectively.3 In the U.S., Massachusetts stands out as a pioneer, having introduced legislation in 2018 that limits noncompete agreements and encourages the adoption of garden leave clauses or equivalent compensatory measures.4
Financial services firms, particularly in New York, have also adopted garden leave clauses to mitigate risks associated with high-turnover roles.5 These precedents highlight the practicality and effectiveness of garden leave in maintaining organizational stability and protecting intellectual capital.
How Should Garden Leave Agreements Be Structured?
For garden leave to serve its intended purpose, careful consideration must be given to the terms of the agreement. This includes defining the duration of the leave, the level of compensation and the extent of the employee's availability for transition support. Additionally, companies must address employees' potential access to sensitive information and internal systems, ensuring that security protocols are maintained without hindering the transition process.
Conclusion
As businesses adapt to the changing regulatory landscape, garden leave structures offer a compliant strategic approach to managing the risks associated with M&A activities. By providing a balanced solution that respects the rights of employees while protecting the company's interests, garden leave can serve as an effective tool after the FTC's noncompete ban. Companies looking to maintain a competitive edge in their M&A endeavors should consider integrating garden leave into their change management and risk mitigation strategies.
Footnotes
1. "FTC Non-Compete Ban: What You Need to Know," Seyfarth Shaw, April 25, 2024, Accessed June 3, 2024, https://www.seyfarth.com/news-insights/ftc-non-compete-ban-what-you-need-to-know.html.
2. Telford T, "The FTC banned noncompetes. What that means for workers and companies," The Washington Post, April 24, 2024, Accessed June 3, 2024, https://www.washingtonpost.com/business/2024/04/24/non-compete-ban-workers-ftc-employers/.
3. Croix N, "The Complete Guide to Understanding Gardening Leave in the UK," Moonworkers, August 6, 2023, Accessed June 3, 2024, https://www.moonworkers.co.uk/blog/guide-to-gardening-leave-uk.
4. Cooper J and Bruce S, "New Massachusetts Law Restricting Noncompetition Agreements" Insights: Ropes & Gray LLP, August 13, 2018, Accessed June 3, 2024, https://www.ropesgray.com/en/insights/alerts/2018/08/new-massachusetts-law-restricting-noncompetition-agreements.
5. Clark S and Lewis T, "Garden Leave Study," DAK Associates, December 23, 2013, Accessed June 3, 2024, https://dakassociates.com/garden-leave-study.
Originally Published 22 July 2024
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