Non-Competes, NDAs, & Contractors, Oh My!  

-- by Molly Tranbaugh

Recent developments in federal and state laws around non-competes, NDAs, and independent contractors are generally trending toward increased protections for employees and contractors. Here is an overview of some of the issues you’ll need to look out for when hiring and managing your team.

Non-competes

Non-compete laws can vary significantly from state-to-state and continue to evolve on both the state and federal level. Below we’ve highlighted FTC rulemaking and California legislation as recent examples of this shifting legal landscape.  

The Federal Trade Commission. Back in April, the FTC issued a rule banning non-competes nationwide and across industries (with some limited exceptions), which would have gone into effect earlier this month. The rule was subject to nearly immediate legal challenges, and a federal court in Texas recently blocked the rule from being enforced. This means that the proposed ban has not gone into effect and the rule is currently unenforceable. There have been conflicting federal court rulings on this issue and further appeals are likely, so the future of the rule ultimately may be decided by the Supreme Court. In the meantime, employers must comply with relevant state law until there is a final resolution on the FTC ban.  

California. Two new laws in California, SB 699 and AB 1076, have reinforced the state’s firm stance against non-competes. SB 699 prohibits employers from entering into or enforcing non-competes even if the agreement was signed outside of California, meaning that a non-compete that is enforceable under different state laws will become invalid if the employee moves to California. AB 1076 codifies existing case law holding that nearly all non-compete clauses are void in California and requires employers to notify employees and former employees (employed after January 1, 2022) that their non-competes are void.  

Nondisclosure Agreements 

Recent laws have focused on limiting the use of NDAs in settlement agreements with employees who have alleged workplace misconduct.  

New York. New York prohibits the use of NDAs in settlement agreements with employees alleging harassment, retaliation, or discrimination in the workplace, and has expanded its existing laws to strengthen these protections, including to cover agreements with independent contractors. This legislation also prevents employers from requiring employees to forfeit compensation received in the settlement or pay liquidated damages for violations of an NDA or non-disparagement provision.  

Federal law. While there is not a federal ban on NDAs in agreements settling claims of general workplace misconduct or discrimination, the Speak Out Act prohibits employers from using NDAs to prevent employees from discussing sexual harassment and sexual assault claims.  

Independent Contractors 

Many early-stage founders prefer to work with independent contractors if their company is not ready to hire employees and provide the benefits that accompany full-time employment. Companies must interact with their independent contractors in a way that will not subject them to claims of misclassification (i.e. you hired me as an independent contractor, but I should be paid as an employee), which can bring significant legal and financial consequences. California is again at the forefront of these issues, and the DOL has weighed in as well.  

California. While not a recent development, it is worth noting that California has one of the strictest state laws on independent contractor classification. California will assume that an individual is an employee unless the company can prove that she is free from control by the company in performing her work, that her work is conducted outside the usual course of the company’s business, and that she is engaged in an independently established trade or business. Although some industries received exemptions (such as app-based drivers) and the law continues to face legal challenges, companies should be sure that they are meeting these requirements when engaging with independent contractors.  

Department of Labor. The DOL previously relaxed its rules around independent contractor classification during the Trump administration, but the Biden administration has reinstated a more comprehensive test and set a higher bar for qualifying as an independent contractor. The DOL’s final rule that went into effect earlier this year requires businesses to evaluate multiple factors under the “economic realities” test, which focuses on the degree of control an employer has over a worker, the worker’s opportunity for profit or loss, the worker's investment in the materials needed to perform the work, and other aspects of the relationship between the worker and the company. Given this stricter rule, we may see an uptick in litigation alleging misclassification.  

This overview only scratches the surface of recent legislation and rulemaking around non-competes, NDAs, and independent contractors, which seem to be changing constantly. Complying with these requirements at the state and federal level requires careful consideration of how companies are hiring and managing their teams.