New Federal Rule Banning Noncompetes May Impact Construction Industry

Originally published by the Daily Journal of Commerce on May 16, 2024

On April 23, the Federal Trade Commission issued Final Rule 16 CFR Part 910 RIN 3084-AB74 banning noncompete clauses nationwide. A noncompete clause or agreement is typically a binding contract that prevents a worker from competing with the employer after their employment ends. The final rule will become effective on Sept. 4, 2024 (pending legal challenges, as discussed below).

The new rule provides:

• “that it is an unfair method of competition – and therefore a violation of section 5 (of the Federal Trade Commission Act) – for persons to, among other things, enter into non-compete clauses (noncompetes) with workers on or after the final rule’s effective date.” The rule covers employees and independent contractors.
• For existing noncompetes entered into before the effective date, the final rule adopts a different approach for senior executives (defined as those earning more than $151,164 annually and who are in policy making positions) – “for senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.”

FTC Chair Lina M. Khan justified the rule in stating, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC noted that trade secret laws and nondisclosure agreements (NDAs) still provide employers well-supported mechanisms by which to protect confidential and proprietary company-specific information, and the rule specifically exempts such types of agreements.

Notably, the FTC did not include in the final rule an obligation from draft versions that purported to require employers to formally amend and rescind existing noncompete agreements. Instead, ostensibly to streamline compliance, the final rule obligates employers to provide notice to any workers (other than senior executives, as noted above) subject to an existing noncompete agreement that the agreement will no longer be enforced against them.

In the construction industry, noncompete clauses and agreements have long served as a valuable tool to protect investment in both employees and opportunities. For companies that invest heavily in training a skilled workforce, noncompete clauses play an important role in building long-term employee relationships that justify heavy resource allocation to training. Similarly, in such a competitive industry as construction, noncompete clauses and agreements with independent contractors and subcontractors can protect a company’s investment in building customer relationships to attract repeat business. Finally, construction companies often deal with or develop confidential and proprietary information including safety programs, customer preferences, bidding and estimating strategies, profitability data, and trade secrets. Noncompetes help prevent the disclosure and dissemination of such valuable information that often takes companies years or decades to build and maintain.

The loss of such an important tool is significant. However, other restrictive covenants such as those preventing solicitation of customers or employees, protecting confidential information, and securing trade secrets, are still permitted and can help construction companies continue to protect some of their most valuable assets (though they must be carefully drafted to avoid becoming subject to the rule).

The full impact of the FTC’s new rule remains to be seen. The rule is already the subject of multiple lawsuits; it is possible a court will take action to block it from taking effect and may ultimately strike it as unlawful.

If the rule takes effect, the impacts may be significant. While the FTC’s justification for the rule suggests it was ostensibly issued primarily to address restraint of workers in the new economy of the cloud and information technology, the rule does not delineate among industries (though it is limited to those under the FTC’s jurisdiction). The proverbial law of unintended consequences will force companies up and down the line of the construction industry – material suppliers, subcontractors, general contractors, developers, and design professionals – to all grapple with the new rule’s impacts and pursue alternative means to protect valuable building blocks on which they’ve built their businesses. The industry would do well to take prompt notice of the new rule and look ahead with its risk managers, insurers, attorneys, and stakeholders to assess all potential impacts and plan accordingly.