Noncompete Agreements: How to Navigate the Changing Landscape

Contractors who care about protecting proprietary company information and attracting and retaining high-quality employees (all contractors) should consider making noncompete agreements a part of their normal business practices. A recent failed attempt by the federal government to completely ban noncompetes reignited the contentious debate about the balance between freedom of contract versus freedom to work, and states have now put the issue at the forefront of their legislative agendas. Changes are coming, and contractors and their employees alike should know what lies ahead and understand how to navigate the changes.

Implications of noncompetes in construction

Noncompetes or noncompetition agreements affect nearly one in five working adults in the United States. A noncompete agreement is just what it sounds like—it’s an agreement between an employer and their employee where the employee agrees not to compete with their employer once their employment ends. In essence, the agreement restricts the employee from immediately joining a competing business or starting a competing business after leaving their employer.

Critics of noncompetes who advocate for a ban claim that these agreements smother innovation, stifle competition, and infringe on a worker’s right to change jobs. These employee advocates assert that a ban on noncompetes would give employees more career opportunities and wage growth.

However, construction industry trade groups express concerns with the consequences of an inability to enforce noncompetes. One assertion is that the agreements are necessary to protect trade secrets and intellectual property. This is especially true in an industry that operates on small margins, relies on proprietary techniques and pricing data, and survives on client relationships and customer lists. Another concern is that employers will be less incentivized to invest in employee training and development when there is no ability to temporarily restrict or limit the employees’ use of the advanced skills developed at the contractor’s expense. Contractors will undoubtedly struggle with keeping skilled tradesmen, project managers, and other key employees if it becomes easier for employees to jump ship for what they perceive as the best available offer for their services. Noncompete bans could exacerbate the industry’s widely known skilled labor gap.

The noncompete landscape is rapidly changing

Currently (and for the foreseeable future), noncompete agreements are governed by state law. For years, there has been a push by many states to limit or prohibit noncompetes that restrict employees from joining or starting a competing business after leaving their employer. This stems from a perceived abuse of employer-drafted agreements that unfairly prevented workers from changing jobs, pioneering, and forming innovative new businesses. And while certain states sought to prohibit noncompetes, other states have pushed back and sought to expand their use.

In April 2023, amidst much state-by-state turmoil, the Federal Trade Commission (“FTC”) issued a final rule banning all noncompete agreements across the country. This rule prohibited employers on a national level from enforcing most existing non-compete arrangements with current workers and entering into new noncompete agreements.

Despite being slated to take effect in September 2024, the implementation of the FTC’s rule has been blocked by the courts due to a litany of legal challenges regarding overreach. On October 18, 2024, the FTC appealed an order from a federal district court that stopped the FTC from enforcing its rule. However, just days ago, the FTC took steps to dismiss its appeal in a federal appeals court. The rule is now widely considered dead.

The uncertainty and controversy stirred by the FTC’s proposed noncompete ban triggered even more state legislatures to re-examine their own stances on noncompetes and led many states to rapidly act on their own proposed legislation. Currently, four states (California, Oklahoma, North Dakota, and Minnesota) ban the use of noncompetes entirely, and thirty-three states and the District of Columbia now restrict their use in some way. As legislators seek to put the issue of noncompetes at the forefront, it’s important that contractors understand their limits, implications, and how to navigate them in the future.

Parameters of noncompetes across the nation

The majority of proposed or passed legislation regarding noncompetes encompasses five broad categories of bans:

• Complete or near complete bans—eliminate all noncompetes in an employment context within the state (with limited exceptions like the goodwill sale of a business or dissolution of a partnership);
• Income thresholds—prohibit noncompetes for workers making below a certain amount;
• Industry bans—eliminates noncompetes for entire categories of workers;
• Other bills—a number of bills include changes or clarifications to the legal basis for a noncompete, the definition of a noncompete agreement, or steps an employer must take to enforce a noncompete;
• Expansions—these are bills that would repeal an existing ban or make it easier for employers to enforce noncompetes.

Contractors should be particularly aware of legislation that restricts noncompetes for particular industries or trades, presents an income threshold, includes clarifications to the legal basis for noncompetes, or entails certain process requirements. Income thresholds may impact a contractor’s ability to enforce noncompetes against project managers or superintendents as compared to higher-salaried project executives or those in business development.

Many states require that the restrictions of a noncompete must be “reasonable.” Typically, a “reasonableness” standard places limitations on the period of time a noncompete may be in place or the scope of the types of business and work restricted—usually requiring that a noncompete be narrowly tailored to specific aspects of a business or restricted to the locations that the employer actually does business.

Contractors should also be aware of state laws that include process requirements for the enforceability of noncompetes. These may include using bolded, conspicuous language in the agreement highlighting the noncompete clause. Other requirements may include a consideration period for the employee to review the agreement before being required to sign.

Considerations in navigating proposed legislation

Contractors should be proactive in protecting themselves from the potential repercussions of noncompete bans or limitations. First and foremost, contractors must stay up to date with their state’s current noncompete laws and legislation that may be in the pipeline.

For those states that do not have complete bans, contractors must be sure that their noncompete agreements comply with any process requirements like review periods or conspicuousness. Also, they must be aware that particular employees or trades may be exempt from the enforceability of noncompetes.

Even in complete-ban scenarios, contractors are not precluded from taking other steps to protect themselves. Contractors can utilize non-solicitation, non-disclosure, and confidentiality agreements to protect confidential information and trade secrets regardless of whether a noncompete is permitted. Non-solicitation agreements, in particular, focus just on the employee’s ability to compete directly by soliciting the contractor’s own customers without broad industry-wide restrictions. However, those agreements may only be enforceable if they don’t function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.

If noncompetes in your state are off the table, contractors may consider restructuring their compensation packages to retain top talent or discourage transitions to others in the industry. This could include higher pay, profit sharing, or post-employment bonuses that could be contingent on not joining a competitor.

Conclusion

Ready or not, changes are coming. Contractors must stay up to date with the latest noncompete legislation for their states and take care to know their limitations under the law. In states where noncompetes are completely banned, contractors must find alternatives. Creative compensation packages, non-solicitation agreements, and confidentiality agreements are just some of those options a contractor may use in order to adequately protect themselves.

Peckar & Abramson Has the Most Experienced and Largest Construction & Infrastructure Practice in the United States – With a Worldwide Reach.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.