FTC rule on non-compete employees has contractors worried

Non-compete clauses have been an important tool for companies to protect intellectual property and ensure they get treated fairly when employees leave.

Non-compete clauses have been an important tool for companies to protect intellectual property and ensure they get treated fairly when employees leave. Now the Federal Trade Commission has voted to ban non-compete agreements. Presuming it holds up in court, and that’s a big if, what could it mean for federal contractors? For some insight, the Federal Drive with Tom Temin spoke with the President and CEO of the Professional Services Council, David Berteau.

Interview Transcript 

David Berteau We are Tom, and thanks for having us on here today. The Federal Trade Commission obviously puts its rules out that cover the whole economy. So it’s a nationwide ban on non-compete clauses. But for government contractors, this has some very unique and I think, deleterious consequences. The biggest one is, as you well know, when a contractor bids on a government solicitation, frequently, one of the requirements is to name and put resumes in of the key personnel, that are going to be performing that work if you win, especially in the services contract arena. Those key personnel actually have a huge effect on your on the government’s evaluation of the contractors proposal and on the ability to actually win the job and be able to perform the work. Oftentimes, though, the proposal isn’t acted on very quickly. As you well know, we’ve covered on your show a number of times. The government takes a long time to solicit, evaluate and award contracts. And so the company needs a way of keeping those key personnel relevant for their bid during the process that the government is going through. Non-compete clauses is not the only way to do it, but it’s one of the most prominent and one of the most effective ways to do it. So this takes away a very, very important attribute for companies to be able to bid and win contracts. And the government itself will suffer from this.

Tom Temin Right. And so can companies, because someone can just simply take what they know about your bid, about your cost structure, about your technical approach. And boom, they’re at the competitor a week later.

David Berteau You’ve hit the nail on the head. One of the most important proprietary elements of a companies process is, in fact, how it bids on a contract and on a solicitation from the government. And it’s not only your own company’s intellectual property. Your approach. It might be the work you’ve done to prepare for this opportunity to help the government have process improvements as part of that, and the people as well. You take that away from a company if you make it possible for that guy to go or that person to go to the highest bidder, then you’re really going to end up hurting and the people this hurts the most, Tom, or the smaller companies who don’t necessarily have the depth to be able to replace somebody, to be able to protect themselves through legal action if necessary. And small companies or big focus of the government. So for this to hurt small businesses, we told the FTC this in our comments submitted more than a year ago now on the proposed rule. The final rule pretty much ignored this process. So you mentioned legal action, and that’s certainly something that we at PSC are looking at on behalf of our members.

Tom Temin Would you file directly a lawsuit against it, or would you just file a friend of the court if other I don’t know who might it will get challenged in court because Lina Khan has lost most of the big one so far.

David Berteau It’s our understanding that some of our fellow trade associations have already filed lawsuits, and I think those lawsuits, I haven’t looked at them personally. But the reports are that those lawsuits are predicated upon whether or not the FTC actually has the statutory authority to do this. I think our basis would be much more on the real impact on government contractors, which not only affects the contractors, it obviously affects the government itself. So the government has a vested interest in this coming out right.

Tom Temin Yes. They seem to favor actions against business, whether there’s any effect from what it is they’re moving against in the first place.

David Berteau Absolutely. And we’ve seen a number of cases. In fact, you and I have talked about a couple of them, where the Trade Commission’s definition of an antitrust dynamic often is very narrowly focused in terms of what the interpretation is. And we think you need to be broadly focused on changes in the impact on the outcomes in the results.

Tom Temin Especially in markets where prices are falling. We’re speaking with David Berteau, president and CEO of the Professional Services Council. And if that wasn’t enough, the Labor Department now has mandatory overtime payment rules. And you’re worried those could be imposed on contracts without the money being able to be there to cover the contractor increased costs?

David Berteau We are worried. And this is a similar dynamic, Tom. It’s a rule that applies to the entire country to the national economy, but it has specific, unique and particular effects on government contractors. The basic proposal here is that, regardless of whether an employee is a salaried employee or an hourly wage employee, if they’re below a certain threshold, in this case, nearly $60,000 a year in terms of salary, then you would have to pay them overtime. Even if they are a manager and they’re a salaried employee rather than an hourly wage earner, this has a big impact on government contractors. Why? Because in many cases, the government requires the contractors to bid low rate employees in order to win the contract. And so you put companies in a bind here. You’re going to have to bid lower rates in order to win. But then you’re going to actually have to pay more for those employees, because you’re going to have to be paying them overtime, even if they’re technically not covered by the law. This kind of deleterious consequence, again, we raised in our comments on this proposed rule back last November. By and large, it’s ignored in the final rule.

Tom Temin It also kind of wrecks a business dynamic for the ambitious that are not expecting to have been hired for hourly work, but they might not be at the top of the scale yet. And so young people especially worked their tails off to get promoted and to get greater responsibility. And they’re not looking at whether they get overtime, but rather whether they get recognition. And eventually the money follows.

David Berteau That’s a tremendous point. We’ve been through over the last four years, since the beginning of COVID, a very different workforce dynamic than we had in the past. And as you well know, we’ve had more job vacancies than we’ve had people looking for work. That’s been true in the national economy, but it’s particularly been true in the government contracting business. And I think that that element of public service, which is a key role that we play, that our members play in supporting the government, is a big driver in attracting the kind of people who care about the mission of the agencies that they support. That’s the real driver here. If you end up nickel and diming them, you’re going to end up driving people away and make the current workforce dynamic where it’s hard to recruit and fill all the jobs even worse.

Tom Temin All right. And one other thing I wanted to ask you about while we have you is a little item in the bill that just passed that was just signed by the president for Israel and Ukraine aid, and that is the maintenance and sustainment support which the Council found is not defined that clearly. And we’re speculating on what that could be all about.

David Berteau Well, this is a really interesting dynamic, Tom. As you know, it took Congress a long time to engage in and finally pass and the president can sign the supplemental. I think it was originally submitted last fall. So it’s been needed for a long time. And if you follow the war, you know that Ukraine has been suffering from, lack of equipment and munitions. Much of the attention here and when the Pentagon announced its package last week, I think it’s about $6 billion. It was largely focused on those, hardware items, munitions and other other military, programs and equipment. But buried in there, the secretary mentioned something about maintenance and sustainment support. This is why we think it’s important from a PSC perspective, signing new contracts, negotiating new contracts for more howitzer shells or more air defense systems, etc.. It’s going to take a while. It’s going to take a while to negotiate the contracts. The companies would take a while to build and deliver the equipment. But maintenance and sustainment is something that could be delivered right away. And in fact, you can do it in the country. There is a lot going on now, but typically it’s shipped back to the items that need to be repaired or shipped back to other countries, to Poland, Romania, Bulgaria or even further away and then have to be shipped back into Ukraine. This is not the kind of thing that supports their needs very well. In addition, Ukraine wants to build up its own domestic capacity and capability. Our view is you can do that a lot better through sustainment kinds of actions where you do the repairs, you do the maintenance, you build up some of the technical capability. You might build up some suppliers for spare parts and components. You get a little bit of the intellectual property, the technical data necessary to repair these things, and you return the items into service a lot faster. So this is not the kind of thing that will take months or even years. This is the kind of thing you can start doing right now. We’re really excited about that at PSC.

Tom Temin But it’s also should be noted, I think, that it would put contractor personnel closer to harm’s way.

David Berteau Well, you’ve hit the item right smack on the head again, as you say, obviously when you have individuals in country, they’re at more risk. And this is not a situation unlike, say, Iraq or Afghanistan, where U.S. military forces could provide security. So companies that would engage in this, and there already are a number of them, particularly from our allies, where they’ve got companies in-country doing work on their equipment, repairing it and maintaining it even today. So the companies themselves would have to be responsible for this security. But I think many of our member companies understand this. They’re very good at it. They know how to take care of themselves and deliver the results necessary. Would be much faster, much easier for Ukraine to keep going and would get equipment back on the line a lot faster.

Tom Temin And by the way, there’s a lot more companies from a lot more countries producing major league arms than you might imagine. I’m speaking of taking a walk through the Army show, for example, every fall. In Washington, there are countries who have significant industrial capacity to design, build and ship major weapons systems, countries that have never fired a shot in anger in 75 years.

David Berteau Tom, I think you pointed out a competitive aspect of this. If we want our U.S. industrial base to remain competitive, both from a technology point of view and a capability and capacity point of view, then we have to play in the same marketplace. And we can’t leave that marketplace vacant from our perspective. In addition, I would note that on the humanitarian side, and there’s billions of dollars in this supplemental for humanitarian aid, the U.S. government, through the U.S. agency for International Development and through the State Department, has quite a large number of contracts already operating with U.S. contractors and American citizens operating in-country today in Ukraine. So it’s kind of an artificial distinction between those who are supporting Ukraine from a humanitarian side or governing side, and those who are supporting Ukraine from military operations and defense side. I think it ought to be the same for both.

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