Jay Aldis and Patrick Kelly | Gray Reed
For years, there has been a state-by-state push to restrict or prohibit non-compete agreements that limit workers’ ability to take a job with a competitor after leaving their employer. This movement to boost employee mobility and wage growth has now culminated in a controversial nationwide proposal by federal regulators. On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that would broadly prohibit for-profit employers from imposing post-employment non-compete restrictions on their workers across the United States. The rule is scheduled to take effect September 4, 2024.
If enacted as written, the FTC’s rule would render unenforceable virtually all non-compete agreements that restrict an employee’s next job after their employment ends. This would mark a seismic shift, with the measure potentially impacting nearly 1 in 5 American workers according to some estimates. Proponents praise it as giving workers more career freedom and preventing employers from suppressing wages through non-competes. Critics, however, argue it undercuts businesses’ ability to protect trade secrets and recoup investments in employee training.
However, the fate of the FTC’s proposed non-compete ban remains uncertain and is hotly contested. The very same day the rule was announced, a lawsuit challenging the rule was filed in federal court in the Northern District of Texas. Within weeks, multiple lawsuits were filed by business groups and states challenging the FTC’s statutory authority to implement such a sweeping regulation of workforce mobility. Some legal experts also question whether the FTC has jurisdiction over employment matters traditionally left to state purview.
As the legal challenges play out, employers across industries are scrambling to understand the proposal’s complex implications and scope.
Understanding the FTC’s Final Rule
- Existing Non-Compete Agreements: All post-employment non-compete agreements with existing employees will be rendered unenforceable, except for those with senior executives who are in “policy-making” positions and earn more than $151,164 per year.
- Future Non-Compete Agreements: All future post-employment non-compete agreements with all employees (regardless of executive status) will be unenforceable and employers can be subject to civil penalties for using them after the rule is effective.
- During Employment vs. Post Employment: The rule will not affect employers’ ability to restrict employees from competing while employed.
- Employment vs. Other Situations: The rule will not affect non-compete agreements in certain relationships outside of employment such as business sales and franchise arrangements, but does appear intended to apply to independent contractors.
- Notice Required: Employers will be required to offer a form of notice to employees that existing non-competes will no longer be enforced.
- Effective Date: The rule will become effective on September 4, 2024 — 120 days after posted in the Federal Register.
- Definition of “Non-Compete” under the Rule: Under the rule, a non-compete is: “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” We’ve quoted the definition from the FTC’s issuance because it will certainly be subject to interpretation and much future litigation.
- Are Non-Solicitation Provisions Banned by the Rule? The FTC clarified in the rule that non-solicitation provisions are not banned if they do not prevent a worker from seeking or accepting work or operating a business. However, non-solicitation agreements can satisfy the definition of non-compete clause where they “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”
- For-Profit vs. Not-For-Profit Business: The rule will not affect true not-for-profit businesses, though the FTC warns of penalties for businesses attempting to skirt the rule by characterizing a for-profit business as a non-profit business.
- Does the Rule Supersede State Law? The FTC’s rule would supersede all state laws to the contrary.
Impact on the Construction Industry
- Outsized Impact on Small Business: Construction industry trade groups have pointed to several major drawbacks of the proposed FTC rule banning non-compete agreements. A key concern is the outsized impact on small businesses with 10 or fewer employees, which make up around 82% of construction companies. Many of these small firms rely on non-competes to safeguard customer lists, proprietary techniques, pricing data, software tools, trade secrets and other confidential information. Losing that protection raises the risk that a former employee could take that valuable intellectual property and client relationships to a competitor, potentially crippling the business overnight.
- Changes to Training: Beyond protecting trade secrets, non-competes have encouraged construction companies to invest significantly in training workers on specialized skills, safety protocols, project management platforms and more. Without non-competes, employers may be less willing to make those costly upfront training investments if skilled workers can easily take that know-how elsewhere after being trained.
- Changes to Compensation Structure: The proposed ban is also expected to force a rethinking of compensation and talent strategies across the industry. With non-competes off the table, construction firms may need to offer higher pay, profit-sharing, equity stakes or other golden handcuffs to retain top talent and discourage defections. However, meeting those increased labor costs could strain finances, especially for smaller businesses.
- Exacerbating Labor Shortages? More broadly, construction trade groups warn the non-compete ban could worsen already severe skilled labor shortages by enabling more job-hopping. If it becomes easier for workers to jump ship, companies may struggle attracting and keeping their skilled tradespeople, project managers, estimators and other key roles.
- More Mobility, Less Protection? While employee advocates argue the rule will facilitate more mobility, career opportunities, and wage growth, the construction sector has underscored the risks of losing intellectual property, recouping pricey training outlays and maintaining a solid workforce pipeline – concerns that could hit smaller businesses particularly hard.
Potential Alternatives
- Non-Solicitation, Non-Disclosure, and Confidentiality Agreements: The Rule does not bar non-solicitation, confidentiality, and non-disclosure restrictions, so long as they don’t “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” These provisions empower an employer to protect confidential information and trade secrets regardless of whether non-compete agreements survive in their current form.
- Post-Employment Bonuses: A post-employment agreement to pay the employee not to compete for a period of time may be worth considering. A post-employment bonus could be contingent on not joining a competitor.
- Require Advanced Notice: Requiring 60 to 90 days’ notice of leaving the company may work to ensure participation in the transition of relationships. However, this approach has risks, including that the employee could do harm to, or abscond with, the confidential information of, the company.
- Garden Leave: The employee remains employed and receives the same compensation and benefits on a pro-rata basis for a period of time. The employer has the ability to transition customer relationships while the employee sits on the sidelines and is paid. The FTC has acknowledged this is not a non-compete.
Time will tell whether the benefits of increased job flexibility outweigh the risks to companies’ human capital investments and trade secrets. For now, the clash over non-competes promises to significantly reshape the employer-employee landscape in the construction industry.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.