On April 23, the Federal Trade Commission voted to adopt a rule banning non-compete agreements in employment contracts, including in construction, that prevent employees from working for competitors or starting competing businesses.  

Some states – California, Minnesota, North Dakota and Oklahoma – already ban non-competes entirely. The final rule, set to take  effect September 4, would extend the ban nationwide.

The rule was swiftly contested, and two lawsuits are seeking a temporary stay of the rule’s effective date. The U.S. District Court for the Northern District of Texas will rule on the stay by the first week of July. If a stay is not issued by August 1, employers should begin preparing for the September 4 effective date.

Several industry groups have expressed disappointment in the ruling, with Associated Builders and Contractors saying, “This new rule will have a harmful effect on their companies as well as their employees, forcing companies to rework their compensation and talent strategies.”

The FTC argues that ban would result in 8,500 additional new businesses created each year, an extra $524 in worker’s pockets annually, and a $74 billion to $194 billion reduction in health care costs over the next decade.

The final rule prohibits new non-competes with all workers. Employers may maintain existing non-competes with senior executives, defined as “workers earning more than $151,164 annually who are in a policy-making position.” Existing agreements with all other workers will not be enforceable after the effective date of the final rule.

The FTC estimates that roughly one in five Americans, totaling nearly 30 million people, are subject to non-competes. Miami-based construction lawyer Alex Barthlet says that while not as widespread in construction, the agreements have become more common in recent years, especially for inside and outside sales positions.

Approximately 41% of ABC members surveyed in February 2022 said they use non-compete clauses to protect trade secrets and business intellectual property, confidential information, customer lists, proprietary pricing and software, and pricing metrics.

What are the pros and cons of non-competes?

Barthlet says non-competes can be a net positive for the industry as they encourage investment in employee training and best practices.

“You have less of a concern that investment is going to be taken elsewhere easily,” he says. “It gives small businesses additional control and additional ability to know that when they're investing in employees or showing them trade secrets that those things will be protected.”

On the flip side, that policy can be off-putting to potential hires. The agreement may designate a geographical region or timeframe in which the employee cannot work in the same industry after separating from the employer.

“Usually, the basis of the termination does not matter,” Barthlet says. “Meaning we could sign a non-compete agreement, and if you’re my employee, and I fire you, it doesn’t mean the non-compete is invalid. So, even though I fire you or lay you off, you still have to deal with a non-compete.”

Beyond that, the agreements can add increased legal liability for the business and potentially expensive litigation fees should an employee breach the agreement.

What should construction contractors do now?

Barthlet suspects that the FTC temporary ban will be paused for quite some time while the case is being litigated. In the meantime, he recommends that any concerned contractors seek guidance from their trusted legal advisor.

“This is one of many changes that happen on a regular basis in most industries, construction included. The important thing is that small businesses recognize that while this is a big thing getting lots of attention, there are lots of little things that happen in their local communities, statewide and countrywide, that they need to keep their ear to the ground on,” he says. “Having someone that they like, know and trust to help manage these issues can go a long way.”

Small business owners and their lawyers should also mutually decide if it makes sense to split any existing non-competes out from various contractual protections. Non-solicitation provisions prevent the employee from soliciting customers of the business or hiring away other employees once they leave. Confidentiality provisions state that information shared with the employee must remain confidential, and upon the employee's termination,  all confidential information must be destroyed or returned.

“In light of the possibility of the FTC ban going into effect…maybe it makes sense to separate the non-compete into its own document separate from those other prohibitions so that if it does go into place, it maybe makes the legal argument easier to say it’s only the non-compete that gets thrown out and the rest of these stay in place,” Barthlet says.

“If you can make it easier to protect your position, that’s probably a good idea.”