May 14, 2024 Article

Understanding the Impact of the FTC’s New Noncompete Ban on Your Construction Business

A few weeks ago, the Federal Trade Commission (“FTC”) attracted considerable media coverage when it issued its final rule banning noncompete agreements for workers in most circumstances and making existing noncompetes for the vast majority of workers unenforceable. Also grabbing headlines are the legal challenges to the final rule leaving employers confused about whether they have to comply with the final rule. Our team anticipated and addressed your concerns in the article below:

What’s the new rule?

Existing noncompetes for the vast majority of workers across industries will no longer be enforceable after the rule’s effective date (September 4, 2024). The only exception is that existing noncompetes for senior executives – who represent less than 1% of workers – can remain in force under the FTC’s final rule. Senior executives are defined as workers earning more than $151,164 annually and who are in positions with final authority to make policy decisions that control significant aspects of the business (typically, c-suite or officer level). However, employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.

How do the legal challenges to the final rule affect me?

Several lawsuits have been filed across the country seeking to enjoin the final rule and more are expected, and it is likely that the final rule will be successfully challenged. But even if the final rule is successfully challenged, the appeals process could take another 1-2 years before a final determination is made.

In the meantime, employers should monitor the status of the legal challenges and prepare to comply with the final rule, including identifying any current and former workers who will need to be notified and evaluating which of those workers may constitute “senior executives” under the final rule.

How does the final rule define “noncompete”?

The FTC is concerned about express noncompetes that prohibit and penalize employees for working for or starting a business with a competitor after their current employment ends as well as de facto noncompetes that have the same functional effect of restraining a worker’s job mobility as a term or condition of employment. For example, an overly broad NDA that effectively precludes a worker from working in the same field after their current employment ends may rise to the level of a de facto noncompete.

What should I do if some of my employees are subject to a noncompete?

You will be required to provide notice to the workers (other than senior executives) who are bound by an existing noncompete that you will not be enforcing any noncompete against them. Model notices are available in a variety of languages on the FTC website, although you may write your own notice. You can deliver notice by e-mail (e.g., an all-staff e-mail) or text message, or deliver a paper notice by hand or mail. If you don’t have contact information for a former worker subject to a noncompete, you don’t have to send the notice.

Moving forward for workers other than senior executives, you won’t be able to enforce the noncompete in court or threaten workers or former workers with enforcement unless the noncompete was breached prior to the final rule’s effective date. But you can still enforce an existing noncompete with a senior executive provided the noncompete complies with applicable state law.

What if we don’t use noncompetes?

No further action is required. Just make sure you don’t use them in the future and that your other agreements (e.g., NDAs, non-solicitation) don't constitute a de facto noncompete subject to the new rule.

Does the noncompete ban cover independent contractors as well as employees?

Yes. The final rule defines “worker” liberally to include employees (full-time and part-time), independent contractors, externs, interns, volunteers, apprentices, and, in some cases, even sole proprietors.

Does the final rule cover my business?

Most likely yes. The final rule covers nearly all for-profit entities across industries, including the construction industry. Only banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act are specifically excluded from the final rule.

What are the alternatives to protect my business in lieu of noncompetes?

The final rule does not impact trade secret laws, non-disclosure or confidentiality agreements, or nonsolicitation agreements which remain powerful tools for protecting your company’s competitive business interests. In addition, “garden leave” provisions or agreements—where the worker is still employed and receiving the same total compensation and benefits but their job duties and access to colleagues are significantly or entirely curtailed—do not qualify as “noncompetes” and are thus exempted from the ban because they are not a post-employment restriction. The Massachusetts Noncompetition Agreement Act (“MNAA”) similarly excludes garden leave provisions from the definition of “noncompete.”

Is there a silver lining to the final rule for my business?

Yes—several in fact. To begin, in today’s tight labor market, your business can now hire workers who were subject to a noncompete in their prior job (including senior executives who enter into a noncompete after the final rule’s effective date). Second, the rule does not ban nonsolicitation agreements that are appropriately tailored to retain your valued customers and workers. Third, if the final rule survives legal challenge, your business will spend less time navigating the patchwork of state noncompete laws that have complicated compliance efforts.

Does the final rule apply to noncompetes between businesses?

No. However, noncompetes between businesses would still be subject to other antitrust laws, and some states prohibit “no-poach” agreements in which companies agree not to solicit one another’s employees.

Does the final rule apply to noncompetes pursuant to a bona fide sale of a business?

No. The final rule does not apply to noncompetes entered into pursuant to the bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

How does the final rule impact our obligations under state law?

The final rule supersedes conflicting state laws on noncompetes, therefore banning otherwise lawful employee noncompete clauses in the states that permit them. Neither Massachusetts nor New Hampshire ban noncompetes outright (except in specific industries that are unrelated to construction). For example, in a recent high-profile noncompete lawsuit, the U.S. District Court for the District of Massachusetts blocked DraftKings’ former executive from doing similar work for DraftKings’ chief competitor Fanatics in violation of his noncompete. The trial judge’s ruling is now pending before the First Circuit on an expedited appeal.

However, New Hampshire and Massachusetts limit business's flexibility to enter into and enforce noncompetes with employees. In New Hampshire, employers may not require low-wage employees to enter a noncompete as a condition of hire. In Massachusetts, noncompetes entered into after October 1, 2018, are governed by the MNAA and must satisfy a variety of criteria to be valid and enforceable (e.g., the noncompete must be in writing and expressly state that the employee may consult with an attorney before signing). In addition, under the MNAA, noncompetes are unenforceable against nonexempt employees, university students participating in internships or short-term employment, employees that have been terminated without cause or laid off, and employees aged 18 or younger.

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