What new rules on overtime and non-competes mean for agencies

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Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin

Gini Dietrich: and I’m Gini Dietrich.

Chip Griffin: Gini, it seems like the federal government here in the US has been very busy giving us to talk about and focus on in the agency community over the last week or so, as we record this. And so we’ve got some updates that…

it’s a little on the drier side for everybody. You know, anytime you get to talk about federal regulations, I know everybody just gets really excited on the other end. It’s like, Oh yes, an episode on regulatory compliance, but it is important and it does, both of these things will affect, I would venture to say just about every listener to this podcast.

So it is worth spending some time listening to us and then thinking about what you need to do for your own agency going forward.

Gini Dietrich: Well, I will give full credit to you because last week you sent me an email about the non competes And said this would probably be a good topic and you wrote a great blog post on SAGA about it.

And then a couple of days later you sent me the, overtime same thing. And I was like, oh, thank you. I feel very well educated now. So thanks for doing all my work.

Chip Griffin: That is my role is to provide you with the research that you need.

Gini Dietrich: That’s great.

Chip Griffin: But, but in all seriousness, I mean, I, I do have a background in public policy.

And so, you know, these things tend to be things that I pay more attention to even above and beyond the fact that it is a management issue for agencies as well, which of course is what I spend most of my day doing. but so I, the, the two key things that we need to talk about here are, first of all, the Federal Trade Commission has issued what is effectively a ban on all non compete agreements with employees.

So obviously this is something that a lot of agencies try to put into place. They have been banned already by some states like California for a long time. They are notoriously difficult these days to enforce anyway, but now this is a comprehensive ban and it applies not just to anything that you put into effect for new employees, not just anything you have with your existing employees, but it also will invalidate almost all non competes you have with previous employees.

So, unless it’s already the subject of litigation or something like that, you know, in which case it will still be up to the courts to handle just about everything is getting wiped out on the non compete side of things. So that’s, that’s the first issue we’ll talk about. And then the second one is one that I think has a more direct impact on more agencies.

And that is a new rule from the Department of Labor that, it’s really not a new rule, it’s an update to the thresholds, the salary thresholds, in order to be considered what’s called an exempt employee. And an exempt employee is someone that you do not need to pay overtime to if they work in excess of 40 hours a week.

And so they’ve changed the salary level, which hadn’t been updated in many, many years to a much higher level. So we’ll talk about that as we, as we move forward. But let’s, let’s talk about the non compete issue first, because I think we can dispense with that a little bit more quickly. And so with non competes, if you’re no longer allowed to have non compete agreements, And this takes effect, I think, in four months, if I recall correctly, there’s a four month,

so probably sometime in the summer is when this would take effect.

But honestly, I’ve advised agencies for a long time not to try to do non competes and instead to focus on non solicitation, non disclosure, some of those things. So for me, I don’t think there’s a whole lot you need to do other than reviewing the paperwork that you do with your employees and, and make sure you’re taking out any clauses that would no longer be enforceable anyway, because why put something in there that’s completely unenforceable.

Gini Dietrich: Yeah. Yeah. So from a non compete perspective, I agree with you and we don’t have it in our contracts just because as a business owner, I don’t see any reason to try to prevent. a former employee being able to work. And a non compete usually says something like you can’t work within a 200 mile radius for another agency.

Like there’s all these rules to it, right? and I think that for us as agency owners, we’re in the business where you can’t really prevent somebody from going to work for another agency. Like that’s just shitty business, right? Saying you can’t, you can’t do that or it can’t be in your hometown or whatever happens to be. Now you can say, We, I don’t want you, I don’t want clients stealing my, my team and I don’t want necessarily want my team going to work for clients, but at the same time, there have also been a couple of situations where the, in fact, one in particular, about four years ago, where it made a lot more sense for my employee to work for the client. And so the client and I had a grownup conversation about it. And then we, you know, she, we went to, we went to her jointly and said, is this something you’d be interested in pursuing? And I remember at the time she was kind of like, Is this a trick question? Like what’s going on?

But it really was in her best interest just from a career perspective. and that’s the conversation that she and I had separately too, which was, I support this if this is what you want to do next for your career. So I think there are lots of things that you can, you can do and you can be a good business owner and a good human being without saying, I don’t, I don’t want you working for anybody that would compete with us in any shape or fashion within a certain mile radius.

Chip Griffin: Right. And one of the things some agencies did in order to try to, to get around some of the, the difficulty in enforcing non competes was they tried to make them more specific. So instead of large geographic areas and saying any agency, they would put together a list of named agencies that you can’t go to work for or things like that.

But even those would be prohibited under this new rule. And I think it’s also important to understand that this applies Not just to employees, but also to independent contractors that you’re hiring. So you cannot put in to the contract that you have with a 1099 that there’s a non compete as well, because that’s that’s an area where I have seen more agencies keep non compete clauses in place.

and so that becomes something that you just need to pay attention to as well. You can’t, you can’t sneak them in there. And even to the extent that you’re doing non solicitation agreements, you need to be very careful that you’re narrowly targeting them. And the legal analyses that I’ve read so far suggest that the regulation is simply silent on non solicitation agreements, so they’re not expressly permitted under this new rule, and it may be something that they go after in the future.

But I think that it’s, it’s more likely if you craft your non solicitation very narrowly to be the clients that the employee is working on, for example, that’s more likely to hold up. And in a small agency, that’s probably all of your clients, right? But if you, if you start making it broad, you know. Any client or prospect that we talk to in the agency, whether the employee is aware or not, I mean, all those kinds of things, the more, the more broad that you make it, the less likely it is to hold up, particularly in the framework that this has created.

Gini Dietrich: So, are you still able to say you couldn’t, like, if you worked on GE, for instance, could you say you can’t go work for Siemens or another GE competitor? Or is that not allowed either?

Chip Griffin: So, you’re talking about for the employee to go?

Gini Dietrich: For the employee.

Chip Griffin: So, yeah, I mean, the non solicitation would basically just mean that they couldn’t So let’s say you work for Siemens as an agency, a well crafted non solicitation would typically say that that employee couldn’t leave and then take Siemens as their own client.

Gini Dietrich: As their client.

Chip Griffin: That’s, you know, that’s typically what they’re designed to protect. Now they can be written in all sorts of different ways, just like any legal agreement. And sometimes it says one thing at the top, but it means another. I’ve seen plenty of non disclosure agreements that have all sorts of things in there that have nothing to do with disclosure. The most popular one that I see in a nondisclosure agreement is a section that says that the one party can’t poach employees from the other one. Sure. Which you always need to be careful of when you’re signing a nondisclosure agreement because that’s kind of a weird thing to put in at what is supposed to be the discussion stage of doing a deal.

That’s typically when you sign an NDA. so, Don’t read the labels. Read the actual language. and I, bottom line is on both this and the overtime. I would encourage you to work with your own professional advisors to review your legal agreements to review your HR policies and procedures and make sure that you are in compliance, not just with these federal rules that we’re hearing about, but frankly, with a lot of the state and local ones, because there are some states that even with this may be more restrictive in what you can or can’t do.

And while both of these regulations are also being challenged in court, and potentially in Congress in the coming months, you know, look, this is only going to increase the drive for states to put these kinds of rules in place themselves, if the federal rules get killed, so we’re on a path for both of these things to happen.

And so it behooves you to figure out how to make it work for your agency, as opposed to just sitting back and saying, well, of course, we’ll take care of this. I’ll be okay.

Gini Dietrich: And what happens if a client comes to you and says, we don’t want anyone from this agency. or anyone who works on our account to go work for a competitor within a certain number of certain amount of time.

Chip Griffin: So again, I would tell you to talk to your lawyer, but I mean, you as an agency, you couldn’t enforce that with your employees. So it would be pointless for you to agree to that. And frankly, Large entities shouldn’t be asking you to do that anyway, because they know what the rules are.

Gini Dietrich: Oh, they ask.

Chip Griffin: But the bottom line is, if you can’t enforce it, then don’t sign it.

I mean, there’s no reason to make a pledge that you can’t live up to. And I think that the, You know, the other thing here is that this, at least as far as it seems to indicate, does not apply to those clauses you have in contracts where it says, the contract you have with a client that says the client can’t hire your employee.

That appears, based on everything I’ve read so far, appears to still be okay to have those provisions so that, as you say, you can have that adult conversation. And we’ve talked previously, you should not get in the way of an employee who wants to go work for a client or a client who wants to hire someone from your agency.

Figure out how to make it work. So I’m okay with putting those provisions into your contracts just to give you the leverage to have the conversation. But for God’s sakes, don’t ever try to enforce them.

Gini Dietrich: Yeah. Okay. So then let’s switch to overtime because I think this one, as I was reading your synopsis of it, I was like, okay, this one’s, this one’s rough.

This one could be pretty challenging for a lot of us.

Chip Griffin: Yeah, so, so let’s think about overtime here in the United States, at least, and, and overtime, basically, any hours above 40. So even if your, your standard policies only work 37 hours, 37 hours a week or something like that, as some agencies have, it’s 40 hours is the magic in the law, at least at the federal level.

And you have to pass two tests in order to be exempt for overtime. overtime pay. The first is that you have to have a particular kind of, they call it professional executive or administrative, I think is the way it’s captioned. So you have to have some kind of a, a meaningful role. You can’t just be like a, you know, a retail clerk or something like that.

It generally is something that requires, I think the exercise of judgment is one of the things that they I’ll put in there, which covers the vast majority of agency employees today, right? Because there are very few clerical workers in agencies in 2024, unlike perhaps 20 or 30 years ago. So most agencies, the vast majority of their employees will end up passing this test.

But again, you know, work with your own professional advisors to confirm that that’s the case. But now, In addition to that, you also have to make a minimum salary in order to qualify. That minimum salary for a long time has been in the low 30s. And so the vast majority, even entry level agency employees, are making well over, you know, 31, 32,000 dollars a year.

And so generally speaking, agencies haven’t been thinking about overtime for a long time now because they do the kind of work and they get paid the amount of money that exempts them.

This new rule says, okay, on July 1st of this year, so less than 60 days from now, your salary has to be at least, I think it’s, I think it’s initially 43, 000, something like that.

But that’s, that’s almost irrelevant. The July one is just, that’s just window dressing to be able to say that there are. adding stepping stones because the real number is January 1, which is only eight months away. We’re not, we’re not talking, not even seven months away. It is very, very close. On January 1 it goes up to almost 60, 000 a year, 58 and change almost 59. I mean, this is, this is a significant amount and there are a lot. of small agency employees who earn less than 60, 000 a year. And so now you’re in a position where you, you know, again, assuming that this rule takes effect, and it was, it was tried about eight years ago and fought back at the very last second, don’t plan on that.

Plan on this is going into effect and you’ve got to figure out what to do. And so if you’ve got someone who’s making less than 60, 000 a year, You have a couple of choices. You can sit there and say, okay, we’re just going to raise their salary to 60, 000. So that we’re done with this, right? We’re, we’re good.

We’re clean. They’re above the level. Don’t have to think about it. But if you’ve, and if you’ve got someone that say, making 55, 56, I would say, for God’s sake, just do that. Just do that. But if you’ve got several employees and let’s say that they’re at 45 to 50 or something like that, And that’s an important part of your business model.

It’s probably not feasible to give them a 30 percent salary bump just to avoid compliance. So what do you do? So at this point, you then have to put in some sort of a process for handling overtime. And that process cannot simply be, you’re not allowed to work overtime. Certainly that can be a piece of it.

And you can tell people they can’t work more than 40 hours a week. And, but you then have to be able to prove that they didn’t work more than 40 hours a week. So you’re going to have to have some kind of a time tracking system and retain those records for a period of time. And you should talk with your own advisors for how long that is, what level of detail you need, but you need to have some kind of system in place.

Even if you say we’re not paying overtime. And of course, if you are, then you’ve got to figure out how you’re paying that as well. So there’s a lot of moving parts here and you really need to think about what’s best for your agency from a business perspective, and then try to figure out how does that fit in with whatever compliance you may need to do in order to be on the right side of this issue going forward.

Gini Dietrich: And I think, you know, you and I were talking about this before we started recording. And one of the things I think that you said that was is important to for everybody here to hear as well is that time sheets are effective for this purpose.

But it’s on the onus of the business owner or the employer to ensure that they’re correct. So you can’t have somebody who is working 45 or 50 hours a week and doesn’t want you to get in trouble. So only puts 40 hours into their timesheet. So you have to ensure that they truly are working only for 40 hours a week or less.

and, and believe that they are, Doing the timesheets correctly and not fudging them. They’re not they’re being honest on them because that could get you into trouble as well.

Chip Griffin: Yeah, because I mean this is not the kind of thing you want to try to do compliance on a wink and a nod That is that is a very dangerous place to be because the compliance issues here can be very substantial the kinds of penalties that you will have to pay. And we’ll be doing as, as we continue to move ahead with this, I’ll be sharing more specific resources and working with some of the, the HR folks that I have regularly on some of my other shows to talk in a greater level of detail, as far as how you can put some of these things together, but you really need to be thinking about these things and not, I mean, again, this is something that, that, barring a, a, a stay from a court is likely to go into effect.

At that 40 something level, July 1, just around the corner, so you don’t have a whole lot of time to, you know, to think about this before you start putting a plan in place. Now, because it is being challenged and because the last time around this did get stopped at the last minute, I would probably encourage you not to make any drastic changes to how you’re doing things, but you should be planning for those if they are necessary, but you don’t necessarily need to roll them out until you get very close to that deadline. Unless you’re looking at, well, this makes sense anyway. Right? And again, if you’ve got someone at, at, at 56, I would probably just put them at the, whatever the minimum number is 58, six, something.

I forget what the exact number is, but just, just do it. Just be done with it. Then you don’t have to think about this anymore. But if you have a bigger issue. Plan for it. And, and by the way, the solution here is not to turn them into independent contractors.

No.

Because I know the last time around, there was some discussion from a number of agencies.

I said, well, we can just, we can just turn these folks into contractors because then the, no, no, for so many reasons, no, this is not a rule to try to get around. It’s a rule to comply with.

Gini Dietrich: Well, and. Quite frankly, the, the professionals who are making less than 40, 000 a year, or even 60, 000 less a year are probably Gen Z who focus on things differently than we did, which is work life balance.

And most of them aren’t going to work more than 40 hours a week anyway. So it gives you an opportunity for a culture shift. If you’re, if you’re, if they’re, if you’re working them to the bone right now, it gives you the opportunity to explore different options like four day work weeks. Like there’s all sorts of opportunity here for you to look at and say, maybe this is the time for us to shift how we do our work so that we can, we can comply to this, but also, Build a better workplace for everybody.

Chip Griffin: Yeah, and look, I mean, I don’t talk to agency owners with employees that make less than 50, 000 a year where they talk about how great these sub 50, 000 a year employees are. They are, by and large, consistently complained about by the owners that I talk with. But part of the problem is you get what you pay for in a lot of cases.

Now, can you find gems who are willing to work for, you know, 40, 42? Yeah, sure. Is it extremely rare these days? Yes, absolutely. And so at some point you need to step up to the plate and be willing to pay what it takes in order to get the right kind of talent. It doesn’t mean you should overpay. Right. You need, you need to pay what it takes to get there.

And that means you need to price to pay for that talent. And again, like most things, a lot of the agency’s problems that I see come back to pricing and communication.

Gini Dietrich: Yep.

Chip Griffin: Can’t price, can’t communicate externally or internally. If you can’t do those things, those are all going to be problems. Solve those problems, then worry about all the levels of detail beyond that afterwards.

Gini Dietrich: Yes, indeed. Yeah. Yeah. Yeah. So like you said, not super sexy, not something that is exciting to hear, but something that both things we, I think we all have to really think about. I mean, as soon as I read your article last week, I was like, okay, and having a plan is smart.

Chip Griffin: Every agency should be working with an HR advisor of some kind anyway, whether that is a pure HR advisor, a lawyer, I mean something, you need to be working with someone who can help make sure that you’re in compliance.

And I would tell you that now is a good time to look at not just these two issues. Certainly look at these two, but then also work with your professionals to look at all of the other policies and processes you have around HR, just to make sure that there’s nothing else that needs to be updated. These got a lot of headlines, but there are plenty of changes that go into effect all the time, particularly at the state level.

And you need to make sure that you are doing the right thing because it’s better to sort it out all at once and get it done now, as opposed to finding out three years from now that you screwed something up and it’s going to come back to bite you and cost a lot of money to solve.

Gini Dietrich: Absolutely. Well, thank you for keeping up on it.

Chip Griffin: I would say it’s my pleasure, but it’s really not. I mean, regulatory stuff is not fun, even for me, but it is important and we will continue to keep you updated. We’ll do another episode if something major changes, but otherwise feel free to check out the resources on the SAGA website and I’ll continue to put out updates.

and I do expect to have a, another podcast episode on Chats with Chip, with Patrick Rogan, who is my HR guru, who helps with all these and can talk about some of the more specific requirements that that you may need to be thinking about here and, and that sort of thing. So with that, we will, we will bring this exciting episode of the Agency Leadership Podcast to a close and hope that we don’t have to do another one on regulatory things anytime soon, because we want you to stick around as listeners and we don’t want you to feel like, geez, you’re getting me bogged down in red tape yet again.

With that. I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich.

Chip Griffin: And it depends.