Yesterday, the U.S. Federal Trade Commission (FTC) voted to adopt a rule that would prohibit employers from asking employees to sign or attempting to enforce non-compete agreements.
The rule will not take effect for at least 4 months and is expected to be challenged in court which could further delay (or even prevent) its implementation.
Some states have already prohibited or severely restricted the use of non-competes, but this would create a uniform national ban on the practice.
Importantly, this rule would also nullify any previously signed non-competes in most cases.
So what does this mean for PR and marketing agencies?
What to do instead of non-competes
For many years, I have advised agency owners to drop non-compete clauses from their employee agreements. Even where not prohibited, they have developed a reputation for being difficult to enforce.
Instead, I have argued that well-crafted non-solicitation and confidentiality/non-disclosure provisions should be used to protect the agency’s interests.
One law firm’s initial analysis of the regulation suggests that agreements like these – if narrowly tailored – may survive regulatory scrutiny.
My advice (as a non-lawyer) has typically been to design these provisions to focus clearly on those clients with whom the employee has done work, had contact, or has confidential knowledge. For small agencies, that is often all clients.
Of course, you should seek your own legal advice to ensure that whatever you ask your employees and contractors to sign meets not just any federal requirements, but any state or local rules that may apply.
It’s not just employees, contractors and partners are included
Agency owners should be aware that the new rules apply to employees, but also to contractors, freelancers, and even partners in the agency itself.
There are limited exceptions for partners or other very senior employees who earn more than $151,164. But understand that these are quite restrictive and still require other tests to be met.
Many agency owners have previously come to me and asked about preventing competition from contractors that they hire, and this new rule would likely prevent that consideration.
Even if the ban is overturned, it’s still a best practice to avoid non-competes
The FTC’s vote on this rule was 3-2 and judicial review is inevitable. There is even potential for Congress to step in if the courts don’t.
So the future of this rule is very much still an open question.
That said, agencies should still drop non-competes from their general agreements with employees and contractors.
The days for these clauses have passed, and even if a federal rule doesn’t take effect, these efforts may well embolden more states to follow California and others in banning the practice.
As agencies continue to focus on remote-only and hybrid work models, there are more employees in more jurisdictions. In general, adhering to the most restrictive rules will make it easier for you to be in compliance without constantly having to check on specific local rules and exemptions.
Legal agreements usually aren’t the best solution
Your agency will always have competition, including both new and old.
If the only thing protecting your agency from significant financial impact is a legal document, then you have bigger problems.
While you shouldn’t encourage employees to leave and start their own agencies, we all know it happens. Focus on building healthy, productive relationships with them so that when they do, they have left on positive terms and are more likely to work with you rather than undercutting you.
Even in circumstances where there are legal agreements in place, if an employee wants to start their own agency business and a current client of yours wants to go with them, you are probably better off finding an amicable way to allow it to happen than threatening legal action.
If a legal document is all that binds a client to you, it’s not a relationship destined for success.
What should your agency do right now?
Now is the time to review all of your existing agreements to understand which ones would be impacted if this rule takes effect later this year.
Going forward, you can take my advice and drop non-competes and ensure your non-solicitation and non-disclosure provisions are carefully constructed or you can hope that the rule is overturned.
This rule will likely be a boon to law firms, and although I always hate spending money on lawyers (with apologies to all of my friends in the legal community), it would be smart to have your standard agreements reviewed in light of this regulation. While they are at it, you may as well ask them to look over the rest of it so that any other items that require updating for modern workplaces can be addressed at the same time.
Of course, SAGA will continue to share further updates as warranted, so be sure to sign up for our regular email newsletter.
There will also be a previously scheduled SAGA webinar on May 7 that will look at how to handle employees who want to go work for a competitor or client. Obviously, I’ll talk about this new rule in that context, so I encourage you to register for free.
