2025 Perspectives in Private Equity: Employment Matters

Employment-related policies are undergoing rapid change, with regulatory shifts impacting the enforceability of non-competes, evolving unionization dynamics, and a growing focus on employee stock ownership plans (ESOPs). Private equity firms must stay ahead of these developments to manage risk, ensure compliance, and adapt strategies for talent retention and workforce management.

Non-Competes 

Over the last few years, there was a significant move across the United States to ban or limit the use of non-competes and other restrictive covenants in employment agreements. We have seen this taking place through a combination of statute and court decisions, creating a varied landscape across the country as different states pursue different routes, including outright bans or bans beyond a certain monetary threshold. For example, California’s non-compete laws are among the strictest in the United States, generally rendering non-compete agreements unenforceable except in limited circumstances, such as the sale of a business. Additionally, recent Delaware court decisions have even made Delaware an unreliable jurisdiction for the enforcement of non-competes, which used to be the go-to jurisdiction to govern non-compete agreements, and we are seeing a shift towards using Texas governing law instead.

At the federal level, the Federal Trade Commission (FTC) proposed a rule that creates a near-total ban on non-competes in employment agreements. However, in August 2024, the Northern District of Texas held that the FTC’s rule banning non-competes was unlawful and set the rule aside on a nationwide basis. The Texas court held that the FTC lacked the authority to issue the rule and that the rule was arbitrary and capricious. The Khan-led FTC appealed the court decision to the Fifth Circuit in October 2024 and submitted its brief to reverse the Texas court’s decision in January 2025 (a few weeks before Trump took office). However, with the new administration coming in, and a Fifth Circuit that is notoriously pro-business and agency-averse, that reversal seems unlikely. As such, we do not anticipate another federal level ban to be proposed during the Trump administration, though non-competes remain on the radar of state and local legislators across the country. It is possible that the FTC and the National Labor Relations Board could try to step up enforcement against employers utilizing non-competes, but under a Trump administration it is unlikely those agencies would be able to devote resources to such enforcement.  

Given that there is some risk that the rapidly evolving regulatory landscape may render employment-related non-competes unenforceable, it is crucial to bifurcate employment-based non-competes from sale-based and equity-based non-competes, so as to not jeopardize the enforceability of sale-based non-competes (which are generally considered enforceable if they are not unreasonable). While this might create more paperwork, this also alleviates some of the risk if employment-related and sale-based non-competes are bundled in the same agreement and the governing jurisdiction declines to blue-pencil applicable provisions.

Across Europe, the enforcement of post-termination non-competes has long been difficult, though no move has been made to ban them at the European Union (EU) level. In the United Kingdom, the previous government had indicated an intention to restrict non-competes to three months and had intended to introduce legislation before it was replaced in the summer of 2024. It is not clear if that legislation will proceed now that the Labour Party is in power. 

Private equity firms will need to continue monitoring legal developments in relation to non-competes and consider reviewing their non-compete agreements to ensure compliance with relevant legislation, develop alternative strategies for protecting trade secrets and retaining key talent in jurisdictions that effectively ban employment-based non-competes (such as California), and consider the proper documentation and jurisdiction to achieve the greatest likelihood of enforcement of the applicable non-compete.

Unionization 

Another issue capturing employer attention in the U.S. is the increase in union activity taking place in various jurisdictions. While unionization is still a small proportion of the total workforce in the United States, under the Biden administration and post-pandemic, there was an increase in union activity in various jurisdictions, industries and at individual plants and assets.

Unions have historically been a strong and unified source of support for a Democratic president or candidate. However, union members across the country, and even some international union presidents broke with this tradition in supporting President Trump. As a result, there will likely be a split between union support for President Trump and unions pushing back against the new administration. No longer is the picture as straightforward as simply assuming there will be less unionization for investors to contend with under Republican leadership. Rather, there will be nuances on an industry-by-industry basis.

Private equity sponsors considering acquisitions of targets with unionized workforces will need to retain a sharp focus on the terms of applicable collective bargaining agreements, including defined benefit pension obligations, and where targets are not in widely unionized industries the potential for unionization of plants or assets down the line should not be overlooked. Furthermore, even if the company is not in an industry that is widely unionized, in the current climate the potential for unionization of plants or assets down the line should be given careful consideration.

Employee Stock Ownership Plans (ESOPs) 

ESOPs may be poised for a breakout in 2025. These plans—a type of tax-qualified employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) that allows employees to own shares in the company they work for while providing tax incentives to owners who sell shares to the ESOP—have long been popular among politicians on both sides of the aisle and (somewhat surprisingly) merited several paragraphs of supportive discussion in Project 2025. 

In addition, Pete Stavros of KKR recently expanded his advocacy for employee ownership to include ESOPs. In September, Stavros launched “Expanding ESOPs,” a new organization backed by more than 50 banks, law firms, academic groups and foundations with a mission to support the adoption and expansion of ESOPs. The group intends to push Congress to update existing rules under the tax code and ERISA to make it easier for companies to create and operate ESOPs for their workers. 

For private equity investors, the potential rise in ESOP popularity is likely to lead to more potential targets being partially or wholly ESOP-owned. Acquiring an ESOP-owned company requires additional up-front considerations around structuring and operations, affects financial analysis of the business and adds another layer of complexity to negotiation of the transaction, due to the ESOP trustee’s independent fiduciary considerations. Private equity sponsors will want to acquaint themselves with ESOP rules now so they can be better positioned to evaluate potential acquisitions of ESOP-owned companies in the next few years.