When a Conflict of Interest Occurs for Employees

An employee has a conflict of interest when a personal financial interest, or a personal or business relationship, could affect how they carry out their duties on a particular decision. In US federal rules this is not left to a single general definition. Three written tests apply, each with its own trigger: a financial interest that a matter will affect directly and predictably, a relationship that would make a reasonable person question the employee’s impartiality, and, for people who work on contracts paid for with a federal award, a “real or apparent” conflict. This guide sets out what each test says, as published in the Code of Federal Regulations (eCFR, checked 2026-10-29).

What counts as a conflict: financial interest versus impartiality

The federal executive-branch ethics rules in 5 CFR Part 2635 split the question in two. Section 2635.402 covers disqualifying financial interests. Section 2635.502 covers personal and business relationships, where the question is impartiality and the employee may have no financial stake at all. A single situation can trigger one, the other, or both.

The financial-interest test rests on a criminal statute. Under 5 CFR 2635.402(a), an employee is prohibited by 18 U.S.C. 208(a) from participating personally and substantially in an official capacity in a particular matter in which, to the employee’s knowledge, the employee or any person whose interests are imputed to the employee has a financial interest, if the matter will have a direct and predictable effect on that interest.

The impartiality test is looser and works through appearances. Under 5 CFR 2635.502(a), the question is whether the circumstances would cause a reasonable person with knowledge of the relevant facts to question the employee’s impartiality. Employees may seek the help of their supervisor, an agency ethics official or the agency designee when applying it.

When does a financial interest create a conflict?

A financial interest creates a conflict only when the matter in front of the employee will have a direct and predictable effect on it. Both words have a written definition in 5 CFR 2635.402(b)(1).

Direct: there is a close causal link between a decision or action in the matter and the expected effect on the financial interest. An effect can be direct even if it is not immediate. It is not direct if the chain of causation is attenuated or depends on events that are speculative or unrelated to the matter.
Predictable: there is a real, as opposed to a speculative, possibility that the matter will affect the interest. The size of the gain or loss does not need to be known, and the dollar amount is immaterial.

Whose interests count

The employee’s own interests are not the only ones. Section 2635.402(b)(2) imputes certain other interests to the employee, including those of an organization the employee serves as officer, director, trustee, general partner or employee. The regulation’s own example involves an employee who sits unpaid on the board of a nonprofit: even though the employee’s personal finances are untouched, the employee must recuse from reviewing that nonprofit’s grant application, because the grant would affect the nonprofit’s finances and those are imputed to the board member.

The test applies to particular matters, meaning matters involving deliberation, decision or action focused on the interests of specific persons or a discrete and identifiable class of persons, such as a contract, application or claim (2635.402(b)(3)). Broad policy options directed to the interests of a large and diverse group are outside the term. The impartiality rule has a parallel limit: in the regulation’s example, an employee drafting safety legislation that will affect all employers of five or more persons may keep working on it even though a spouse works for an affected corporation, because the legislation is not a particular matter involving specific parties (2635.502, Example 2 to paragraph (b)).

Covered relationships and the impartiality test

Under 5 CFR 2635.502(b)(1), an employee has a covered relationship with:

a person with whom the employee has or seeks a business, contractual or other financial relationship that involves more than a routine consumer transaction (a prospective employer described in 2635.603(c) is excluded, and job seeking is handled under subpart F);
a member of the employee’s household, or a relative with whom the employee has a close personal relationship;
a person for whom the employee’s spouse, parent or child is, to the employee’s knowledge, serving or seeking to serve as an officer, director, trustee, general partner, agent, attorney, consultant, contractor or employee;
any person for whom the employee has, within the last year, served in one of those roles; and
an organization, other than a political party described in 26 U.S.C. 527(e), in which the employee is an active participant.

“Active participant” has an edge case worth knowing. Participation is active if it involves serving as an official of the organization or in a capacity like a committee chair or spokesperson, or participating in directing its activities. Significant time spent promoting specific programs, including coordinating fundraising, is an indication of active participation. Paying dues or donating or soliciting financial support does not, in itself, constitute active participation.

A covered relationship alone does not end the analysis. When the employee knows a person with whom they have a covered relationship is or represents a party to a particular matter involving specific parties, and the employee concludes a reasonable person would question their impartiality, the employee should not participate unless the agency designee has made a determination under paragraph (c) or granted an authorization under paragraph (d). Under paragraph (d), the designee can authorize participation where the matter would not violate 18 U.S.C. 208(a) and the Government’s interest in the employee’s participation outweighs the concern that a reasonable person may question the integrity of the agency’s programs.

Employees of organizations that receive federal awards

A different rule reaches the employees of non-federal organizations. Under 2 CFR 200.318(c)(1), a recipient or subrecipient of a federal award must maintain written standards of conduct covering conflicts of interest, governing the actions of its employees engaged in the selection, award and administration of contracts. The rule uses a broader trigger than the federal-employee tests: no employee, officer, agent or board member with a real or apparent conflict of interest may participate in the selection, award or administration of a contract supported by the federal award.

The regulation says a conflict of interest includes the situation where the employee, officer, agent or board member, any member of their immediate family, their partner, or an organization that employs or is about to employ any of those parties, has a financial or other interest in or a tangible personal benefit from an entity considered for a contract.

The same paragraph restricts gifts. These individuals may neither solicit nor accept gratuities, favors or anything of monetary value from contractors, although the recipient may set standards for situations where the financial interest is not substantial or a gift is an unsolicited item of nominal value. The standards must also provide for disciplinary action for violations. For the wider procurement rules around this paragraph, see 2 CFR 200 procurement standards.

What to do when a situation may be a conflict

Identify the particular matter and the interests it could touch: your own, those imputed to you under 2635.402(b)(2), and any covered relationship under 2635.502(b)(1).
Ask whether the effect would be direct and predictable. If yes and the interest is financial, recusal (not participating in the matter) is required unless a waiver or exemption applies (2635.402(c) and (d)).
If the concern is impartiality rather than money, consult your supervisor, an agency ethics official or the agency designee under 2635.502(a).
If you work on a federally funded contract at a recipient organization, check your organization’s written standards of conduct, since 200.318(c)(1) requires them and requires that anyone with a real or apparent conflict stay out of the contract.

Common mistakes

Looking only for personal money. Imputed interests and covered relationships can require action even when the employee personally gains nothing.
Assuming a spouse’s employment is irrelevant because the spouse owns nothing. The financial test in 2635.402 may not be triggered while the 2635.502 impartiality process still applies, as the regulation’s example of a spouse employed by a company seeking agency approval shows (2635.402(b)(2), Example 2).
Waiting for an actual conflict at a federal-award recipient. The standard in 200.318(c)(1) is “real or apparent.”
Ignoring the one-year look-back. A person the employee served in a listed role within the last year is a covered relationship, and recusal tied to a former employer runs for one year after resignation (2635.502(e)).

Related rules compared

Rule	Who it covers	Trigger	Consequence stated in the rule
5 CFR 2635.402 and 18 U.S.C. 208(a)	Federal executive-branch employees	Participating in a particular matter with a direct and predictable effect on a financial interest of the employee or an imputed interest	Recusal, unless a waiver or exemption applies
5 CFR 2635.502	Federal executive-branch employees	Covered relationship plus circumstances that would make a reasonable person question impartiality	Do not participate unless the agency designee determines or authorizes otherwise
2 CFR 200.318(c)(1)	Employees, officers, agents and board members of federal-award recipients and subrecipients involved in contracts	A real or apparent conflict, including interests of immediate family, a partner or an actual or prospective employer of those persons	May not participate in selecting, awarding or administering the contract; written standards must provide disciplinary action

For the other conflict categories, see types of conflict of interest (actual, potential and perceived), appearance of a conflict of interest and conflict of interest versus conflict of commitment. The federal ethics regulation as a whole is covered in 5 CFR 2635.

FAQ

Does owning stock always create a conflict of interest?

No. Under 5 CFR 2635.402, a financial interest creates a disqualifying conflict only when a particular matter the employee participates in will have a direct and predictable effect on it. In the regulation’s example, an employee who owns stock in a company that is not bidding, and whose competitor is, need not recuse, because any effect would be at most indirect and speculative.

Is an apparent conflict enough?

For federal-award recipients, yes: 2 CFR 200.318(c)(1) bars an employee with a real or apparent conflict from taking part in a contract supported by the award. For federal employees, the impartiality test in 2635.502 is itself an appearance test, based on what a reasonable person with knowledge of the facts would question.

Do these rules apply to every employer?

No. The first two sets of rules apply to federal executive-branch employees, and the third to people working on contracts under a federal award. Other employers, including most universities and companies, set their own conflict-of-interest policies, which should be consulted directly.