Getting up to speed with the new FTC non-compete rule with Sharon Toerek

Hey, everybody. Drew here. You know, we are always looking for more ways to be helpful and meet you wherever you’re at to help you grow your agency. It’s one of the reasons why we’ve produced this podcast for so long, and I’m super grateful that you listen as often as you do. However, there are some topics that are better suited for quick hyper-focused answers in under 10 minutes. That’s where our YouTube channel really comes in. For quick doses of inspiration, best practices, tips and tricks, head over to youtube.com/the at sign Agency Management institute. Again, that’s youtube.com/the at sign or symbol.

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Running an agency can be a lonely proposition, but it doesn’t have to be. We can learn how to be better faster if we learn together. Welcome to Agency Management Institute’s Build, a Better Agency Podcast, presented by White Label IQ. Tune in every week for insights on how small to mid-size agencies are surviving and thriving in today’s market with 25 plus years of experience as both an agency owner and agency consultant. Please welcome your host, Drew McLellan.

Hey everybody. Drew McLellan here with another episode of Build a Better Agency. Welcome back. Super glad to have you. You know, we just had a new FTC rule about no competes, and so whenever anything happens on the legal front, I am always very quick to call AAMIs friend and legal counsel, Sharon Toric to get the scoop and to have it translated into non-legal language for me. So that’s where our guest is today, and I’m gonna talk to you about her a little bit more in a second. But one of the things that is true about Sharon is she’s one of a handful, I think there’s maybe six or seven, what we call preferred partners at a MI.

These are businesses that serve our community, that serve agencies that we have had a wealth of experience with. Our agencies have had a wealth of experience with that we have vetted very carefully, and we feel confident in not only their professional expertise, but even more so that they embrace and care for agency owners and leaders in the way that we do. And that we know that not only are they gonna get the best of the best of their professional counsel, but they’re also gonna be treated really well and taken care of as great clients. And so if you’re interested in learning more about that program and meeting the professionals that we sort of put our stamp of approval on, head over to the Agency Management Institute website, and under the resources section you’ll see an a MI Preferred Partners Link.

And you can go there and read about those people and why we believe so strongly and what they do, and we’re so proud to endorse them and support them as they serve our community of agencies and agencies beyond a MI. So with that, Sharon Torque is an IP attorney. They do a lot of contracts, they only work with agencies, and so they live and breathe your world just like you do. What I love about Sharon and her team of lawyers is that they understand our world. They understand what motivates us. They understand our risk tolerance. They understand what we have to do to stay protected. They understand sort of how we think, and they can translate the most complicated legal issues into language that we can sort of wrap our heads around so we can make good decisions for our business.

So Sharon is our go-to has been for years. And so, like I said, when the FTC came out with this new rule, I knew AI wanted to understand what it meant, but BI wanted to make sure you understood what it meant. And so we’ve invited Herb to be back on the show today to talk specifically about that and sort of what the trickle down effect of that rule is in terms of employees and independent contractors and other folks like that. So without further ado, let’s welcome her to the show. Sharon, welcome back to the podcast. Glad to have you back.

Thanks, drew. I’m excited to be back with you too.

Always seems like when I am like, oh, I gotta get Sharon back on the show, it’s because something has changed and in a lot of times something, something has changed in a way that is not advantageous for agencies. And so what triggered this conversation, of course, was the new FTC rule about non-compete. So will you first just give everybody, I think all the listeners know who you are, but just, just in case somebody’s new to the show and new to the planet, tell everybody a little bit about you and your specialty, especially both with agencies and the areas of law that you specialize in.

And then I wanna, I have a bunch of questions about all of the what the, what this new FTC rules for means for all of us.

Yeah, absolutely. So my firm is Toric Law. We do business in the agency world as legal and creative. And we are a firm designed to help independent marketing agencies small and mid in size across the US and basically in three buckets, one of which is intellectual property protection and monetization, one of which is contract development and negotiation for agencies, and the third of which is marketing regulation compliance. And that’s where our conversation today, I think that’s the bucket it will fall into. But we help agencies day to day with the, the legal issues that are most specific to running an agency and doing business as an agency in the marketing world today.

And I’m an IP lawyer by background, which is how I sort of made my journey into working with marketers and then more narrowly with agencies. And this firm is, which isn’t my first one, is almost 10 years old, and I founded it just to work with agencies. So there you are.

Yeah. And a lot of times when you come on the show, you’re talking to us, yes, we’ve talked about contracts, but a lot of times we’re talking about protecting intellectual property, but either ours or our clients. We had you on the show recently talking about what AI is doing in terms of all of those things. What can we legally own and not own, and how do we show up? And one of the ways that I know that you help lots of agencies is you have some sort of what I think of as starter kits or, or cheater kits where you’ve put together a bunch of templates that help agencies build out contracts and things like that in a way that are cost effective for them, but still legally correct and proper.

And so I think you have three or four of those. Can you quickly just rattle those off and then we’ll put a link to all of those in the show notes for those of you who are listening that are like, yeah, I, I do need to look at my contracts or whatever it is. So what, what, remind me again Sharon, what ones do you have?

Yeah, I appreciate that. So we have an agency AI legal toolkit, which is a set of materials to help you deal in your contracts and in your policy making with AI as an agency. We have a strategic alliance toolkit, which ’cause because we noticed a substantial uptick over the last two years in agencies collaborating with one another to serve a common client or goal. So we have a a, a toolkit

That’s a brand new one, right?

That is relatively new. The, it’s about two to three months old. So usually when we release a new one, we’ll do a q and a session around the topic itself, which is free and informative whether or not you’re interested in the package, but, and we’re about to release one on getting your money. This is gonna be all about agencies and collecting their receivables and the necessary language to put in your contracts upfront, some tools and methodologies for dealing with a delinquent receivable and some additional things in that regard, not that’ll be out within the next 30 days or so. And then we do have a series of, and these are more customizable, but they start with our best practice templates, master service agreements, independent contractor agreements, the kinds of recurring tools that every agency needs in its toolkit day to day.

Yeah, yeah. And I know a lot, many, many, many agencies listening here and a MI agencies have taken advantage of those and, and find them not only helpful and protective, but it’s really cost effective. So again, listeners, we will have a link to all of those in the show notes, so you can take a look at all of those. And that also will let you get on Sharon’s newsletter list so you can find out when those Q and As are and all of that. So with all of that, clearly you have a depth of expertise that, and you are one of AAMIs, I think we have six or seven total preferred partners. So again, Sharon works with dozens of MI agencies and serves them incredibly well and is also the agent, agent, the attorney for a MI and Danielle and I personally.

So just in case any of you’re wondering, does she know her stuff? Obviously we think she does. So, all right, let’s talk. Well,

Thank you. And we’re, we’re proud to serve a MI and a MI agencies, that’s for sure.

Yeah. So let’s talk about what the heck the FTC did. So they came out and they basically said non-compete clauses no go. So talk, talk a little bit about what the landscape was prior to this ruling, what you think triggered the ruling and what it, what this new ruling means to us.

Right. Well, so late April, which was about or less, a little less than 30 days, as you and I sit here and have this conversation today, the FTC has come out with federal rulemaking, which will be effective in the fall. We don’t have an actual implementation date from the government yet, but the new policy will be, and it’s interesting to me that the FTC did this rulemaking versus the Department of Labor, or, but their, you know, their basis for getting involved was that it was a fair competition issue, which I suppose on some level it is. But in the fall, enforcement of non-competition covenants and employment agreements with workers, and I’ll get to that in a second because there’s some things about that definition that agencies need to understand will not be enforceable, which means that if you have an agreement with a, an employee, if you have a policy in your handbook, if you have a covenant in an agreement with an independent contractor, which is why the use of the terminology workers is so important because they have scooped in those freelancers that you have on your bench as an agency, you won’t be able to enforce a non-competition covenant against them any longer, which means that they can go to work with another agency who does what you do.

They can go to work with an in-house marketing department potentially who is currently serving them through your agency. So, as I said, we don’t have an exact implementation date, and there is already litigation against the federal government to try to avoid or delay enforcement of the regulation, just like there was when Corporate Transparency Act was implemented a few months back and is on hold right now in a lot of ways. So,

So, so let’s break this up. Let’s talk about how it, how it’s gonna impact us with our employees first, and then let’s talk about how it’s gonna impact us potentially with the, with our contractor.

Right? So a couple things to know if you currently, let’s talk about employees, as you said. Yeah. if you currently have a written employment agreement, and I hope you do with key employees, or you have written policies, which I hope you do, and, and a handbook or whatever, then included non-competition covenant, meaning that as far as you’re concerned as an agency owner, when an employee leaves you, they cannot go work for a competitor for a specific period of time. Those are not gonna be enforceable once this federal rule becomes implemented. So what do you have to do to deal with that? Well,

So some states though, in some states prior to this though, if I rem if I, if I remember right, some states made non-competes pretty challenging even prior to this ruling, right? It was really a state by state thing,

Right? So it’s true that this is one of the few areas where I am, I’m actually applauding the feds for taking action at a national level because we did have a patchwork of regulation state to state, and in some states it was becoming impossible to enforce non-competition covenants. Anyhow, we have been dialing back our advice for sure with agencies, particularly in what we call the troubled states like California, New York, and a few others, that these are not gonna be enforceable, don’t, don’t include them in your form sets anymore, right? Because you know, it’s just gonna create questions where there don’t need to be any, this takes it up to the federal level and makes a uniform policy of non-enforcement for non-competition covenants.

So I know that, again, prior to this ruling, a lot of times the advice was non-competes are difficult to enforce, but non-solicitation, you can’t solicit clients or cowork former coworkers were, was enforceable. So is this is the FTC ruling basically making that the rule of thumb, now nationally, assuming it goes through and it actually gets implemented,

If it’s implemented federally, non-solicitation covenants will still be permissible.

Okay.

You know, my council to agencies who have non-solicitation covenants is to really think them through. And where what you need to be concerned about with those is make them reasonable in terms of tying geography space. It’s always been easier to do that with non-solicitation covenants that it had. Sure. And I also remind agencies that if you are concerned about protection of your secret sauce, your sensitive client, your client list, any other intellectual property that you need to be holding close to you to be competitive, non-disclosure and confidentiality covenants are still absolutely enforceable. So you really should be focusing your efforts on making certain that your non-solicitation and your non-competition covenant language makes sense.

It’s reasonable, it’s enforceable as it can be in your state where you’re doing business.

Okay. So FTC comes out with this new ruling. And what, in layman’s terms, what does this rule say that we can and cannot do?

So you do not have to rewrite the contracts that you already have in place with your current employees. You do have to let them know in writing that the non-competition covenant in their contract is not enforceable once the federal rule becomes law. And you cannot have non-competition covenants in your contracts for new employees once the, the legislation or the rulemaking becomes policy. So what that means is you need to think about, is this an inflection point for your agency where you should be looking at your agreements all over again anyhow? Yeah. Because you’re gonna have to be sending your client, your employees, something in writing to talk about this.

So we’re just gonna give them notice that they’ve got a contract that includes this and that we acknowledge we can’t enforce it. Or is it easier to just say the federal, the FTC has changed some of the rulemaking regarding employment relationships, here’s a new compliant and just omit the non-competition covenant. I think that’s gonna be an easier conversation for some agencies right. Than others. So, and

But, but if you have an employment agreement or you don’t have an employment agreement, if you have an employment agreement that does not include non-compete language, then you don’t have to do anything, right? You

Don’t. That’s

Correct. Okay. Okay.

And then the second thing to do is take a look at, and I think this is gonna be a harder lift for most agencies, your documentation for your freelancers and your independent contractors. I know that some of our listeners don’t have anything in place with those folks. You need to, for lots of reasons, which are beyond the scope of our conversation on

This topic. I’m, I’m teasing all of you right now,

Drew’s ticking you. I’m just kind of acknowledging it for what it is. Yeah, please, if you don’t have written contracts with your freelancers and independent contractors, get those in place. And when you do, they’re included in the definition of worker under the new FTC rule on non-competes. And so you won’t be able to have a non-compete and those agreements either. And you should be informing those folks or giving them new agreements if you currently do have a written agreement in place that includes a non-competition covenant. We have not included non-comp language and freelancer agreements for years at our firm. It’s just I’ve never felt they were fair and I’ve always felt like they’ll be difficult to enforce.

And so our standard practice was never to include them in independent contractor agreements, but some agencies may have them in there. And I think we should talk a minute about what this means for, I know a MI does a lot of m and a work for agencies.

We do. Yeah.

What about selling your business and having a non-compete agreement in that contract? Oh, yeah. So that you can, And start a competing agency with the person who you just sold your business to. So there’s an exception for that. if you as an owner are selling your business to a, an employee group, or you’re selling it to a third party buyer and you own at least 25% or more of the business at the time, it is permissible for there to be a non-competition covenant in that purchase and sale transaction. So any of you who are fearful because you’re potential buyers of your agency or of another agency that is an exclusion or a carve out to the FTCs new policy, assuming it goes into effect,

Okay, so the, the new ruling covers full-time employees, part-time as independent contractors, interns, so anybody who’s an apprentice. So all of those things we’re now saying that you can’t have a no compete. So in the, in the independent contractor language, I, I think for a lot of agencies they’ve had a confidentiality agreement in place. God, I hope they have. But is that really, and is that really all that we can hold an independent contractor to in terms of sort of that relational definition?

No, I think you can absolutely hold an independent contractor to a non-solicit. Okay. Clause an agreement. Because it’s one thing to say if you stop working for us independent contractor, you will work for other competing businesses or provide services to them for X period of time, which is not realistic, unfair, and unenforceable. It’s another thing to say, if we part ways, you’ll not go to our clients and directly solicit business from those people so that they, you know, go to you directly instead of coming to us as an agency that’s still permissible. That’s non-solicitation versus non-competition.

And it is enforceable. It’s not, okay. It’s not a part of the FTCs new rule.

Okay. So I wanna take a quick break and then when we come back, I wanna dig a little more into, now that the FTC has made this ruling, what do we need to do? Do we need to do it now given that it’s already been challenged and all that? So we’ll come back and talk about sort of like practical next steps for agencies on this with both their employees and their independent contractors. But first, let’s take a quick break. I promise I’m only gonna keep you a minute before we get back to the show. But I wanna remind you that the Build a Better Agency Summit, the annual conference where we bring 350 agency owners and leaders together is coming up May 21st and 22nd. May 20th is a AMI family day or member day.

But whether you are a member or not, we would love to have you with us May 21st and 22nd to read more about the conference, see who the speakers are, or register head over to agency management institute.com and the very first button on the nav is BABA summit. Click on that and all the information is right there. And we would love to see you in Denver in May. All right, let’s get back to the show. Alright, we are back with Sharon Toric, AAMIs favorite attorney and she is talking about the new FTC ruling that says non-competes at a federal level, meaning all throughout the states are going to be a non not permissible. And how that impacts employees and independent contractors.

I’m curious, is this a, is this a US thing or are there laws like this? Are we ahead of the game versus the rest of the world? Or like normal? Are we behind the rest of the world when

It comes to, I think we’re behind the rest of the world. I think that Europe in particular and other legal and political systems that model themselves more on the European system has much more worker friendly policies versus owner friendly policies when it comes to issues like this. And I think that it’s more likely to be entrenched in the culture that the employer is there to take care of the employee and the employer is there to not do anything that will limit the ability of the employee to earn a living. So you have a lot of very protectionist culture, a lot of protectionist rulemaking around employees and workers and their rights.

Yeah, so the US is very independence focused. It is, tends to be, I think, more pro entrepreneur. You know, that’s just my observation. I’m looking at the two legal systems differently. So I think we were a little behind and I think that if this policy becomes the law, it’ll make us a little bit more like those states and nations that protect workers’ rights a little more fiercely.

Just very briefly, the FTC came out with a ruling. Somebody’s already challenged it in court. So what’s, what’s the likely timeline of this?

It’s, you know, I have been talking with other lawyers to kind of gauge their opinions about this. And the most recent one I spoke with a few days ago who was in labor and employment law specialist doesn’t think there’s gonna be much change to this, this policy and doesn’t feel very confident about the US Chamber of Commerce’s lawsuit against the federal government on this point. But I do think that we’ll probably see a delay. And the current plan is for fall implementation. It would surprise me if we saw this bump into early next year while they, while the litigation winds itself through the courts. You know, I think that there’s some things that agency owners can do to sort of prepare themselves so that they’re not feeling whiplash.

Yeah, if this actually were to come to fruition sooner rather than later, now is a good time and you should be doing this anyway. But this is as good a trigger as any to take a look at what is the current state of your written agreements with any of your key employees, your handbook policies and procedures, and do they need to be updated on this point and could they use a refresh in general? This is the good juncture to sort of take a look at. You gotta address them anyway to make sure that this language is reviewed and you understand what you need to say about it to your employees When you do, that’s the first thing. Take a look at your agreements, assess.

The second thing is start thinking about what your communication plan is gonna be to the employees who you have to inform of this because that is your affirmative obligation as an owner. if you have employees who are currently subject to these covenants, are you going to inform them via a letter in writing that says, we know you have this covenant according to federal law. It’s not enforceable any longer. The remaining terms and conditions of your agreement are in effect. Or is this a good juncture for you to just update your agreements, have everybody sign new ones and and the communication be there have been some changes and they, those affect some of the terms that are in our agreement.

And so here is your new agreement and just get everybody to sign new paper. It’s up to each agency to determine which approach makes more sense. But I would say by midsummer, late summer latest, you should be in a position to have checked those first two things off your list. And then if you’ve done those things, you’ll be ready for new employees as they come along. ’cause you’ll have your new agreement, it won’t have the objectionable language and your policies and procedures will otherwise be updated and ready to go. So I think those are the things that agency owners need to be focusing on. And you know, my experience working with hundreds of agencies over the years is that this is the least sexy part of the business to them is having to be proactive about legal affairs.

And so they usually need, you’re

Like the dentist, right? They need pe People don’t want, people don’t want to come see you twice a year to have their cleaning. No, they man, when they get a cavity, they the canal. When they get a cavity, they wanna see you on Saturday morning. Right.

Awesome. Yes, absolutely. And they needed the cavity fixed two days ago. That’s right. I get it. This

Is your but, but it’s also, you know, you and I have talked about this a million times. You can, you can spend a little time and money to get it right before you’re into trouble or you can spend a lot of time and money to get out of the trouble that your lack of preparation got you into. Yeah. And, and this seems to me like this would be one where, you know, I, one of the things we talk about a lot in our peer groups and things like that is, you know, not only, not only do we live in a litigious world, but a lot of our younger employees with their helicopter parents, you know, every time you turn around their mom or dad is going, well you should sue for that. You should blah blah blah for that. And so, I mean, I just think, I think our risk has gotten, I think our exposure has gotten deeper.

And so, you know, this is one where, you know, somebody wants to cause a hassle. They certainly could. And it’s as easy as changing a handbook and a, and a contract to, to protect yourself. And so, right. This is a, this is a measure, you know, twice cut once sort of thing it seems.

Yeah, true. And also, you know, we are dealing with a work worker culture right now where yeah, the current newest generation of agency employees this, this is a crowd that is not afraid to ask for what they want, demand what they want and confront when there’s a policy that, you know Yeah. Impacts them adversely. And so staying ahead of that is important. And I, I, I’d also say this, I don’t think, you know, agency owners are strong entrepreneurs. They, they like risk, they like developing new things, they like creating, they don’t like being slowed down by government regulation generally.

Right. Which I understand. I would counsel though to not waste a lot of time worrying about the government making things harder for you as an owner. Because the truth is there’s a strong likelihood you’re already living in a state where it was getting difficult if not impossible to enforce Yeah. Right. Regulations anyway. And you just need to find other ways to be competitive and to protect the agency without relying on this tool. Because you know, it’s, for some of us, it’s been a good run, but we need to be creative about ways we’re going to protect ourselves in terms of our ip, our client relationships double down on making certain that you’ve got a number of people at the agency who are face forward with your clients, even if they’re not in an account facing role.

It’s just so that the relationship with your client isn’t about the relationship with one employee at your shop. Right. Right, right. Because that’s what we’re always,

It’s always risky for sure. Yeah,

Yeah, yeah. I mean you’ve got that one key person who leaves and goes to another agency and you know, the client follows them there. Yeah. Because remember it’s not solicitation. If you’re key employee leaves goes to a competing agency and the client voluntarily follows them. Right. They haven’t been solicited. So, you know, which probably

Is pretty hard to prove.

It’s pretty hard to prove. And the truth is, if you’re in that situation, it’s probably because you didn’t have strong enough relationships with enough team members. Right?

That’s right. That’s

Right. At your agency with the client. So, you know, be looking at those aspects of it in addition to getting ready for the legal implementation. Yeah.

Okay. So on the employee side, you are good counsel is now is a great time that before the end of the year, so maybe by this summer you’ve updated your handbook and if you have contracts, any kind of employment contract with your team members or you have a separately, some agencies have a separate no compete or no solicitation signed agreement. Right. That you would update all of those to reflect the new FTC rule that says non-competes are not gonna be enforceable anymore.

Correct. Decide whether you’re going to rewrite the agreement for existing team members or simply notify them in writing that the non-compete is not enforceable. Right. You’re gonna need new agreements anyway. So decide whether

You and new handbook language, right?

Right. Exactly. Yeah. So focus your time on that Yeah. Over the next few months so that you’re in a state of readiness if and when this is implemented federally. Yeah.

Alright, so let’s talk about independent contractors. Remind us again, because I think that this is a sticky wicket for agencies. Many agencies, not you listening, but other people, many agencies really dance all over the line of what an independent contractor is versus an employee. Right? So remind us again, sort of if, if the labor department or someone else were to come knocking on our door and say, I think that Babat is an employee, you’re treating them like an independent contractor, what are the rules that will protect us that they are actually an independent contractor? And then, then we’ll talk about what do we need to change because of this ruling?

So real quickly, what, what, how do we protect ourselves in terms of the relationships we have with some of these go-to contractors that we use every day or every week?

Right. Well, so just a refresher on the things that have always been factors in classification of employee versus contractor. Are you dictating where they work, when they work, the amount of time they work, are they using agency equipment, are they using agency email systems? Are you giving them a title that’s visible to the external world? These are all things that are gonna make them harm more likely to be classified as employees versus independent contractors. Do you have a written agreement with them? This is a huge factor for distinguishing between an employee and an independent contractor.

And is this an individual or is it an entity? You’ll be a lot more successful in classification of somebody as a contractor if they have an entity, if they’re an LLC or an S corp and the contract is between your agency and their company. That’s a business to business arm link, arms length transaction

E even if their company is just them.

Correct. Yeah. Because the contract will be between their company and your agency. Yeah. And so these are all factors and all the risk of doing business with you will be on them as a business, as a company versus letting them use your internal systems for timekeeping. I just cringe every time I hear that one because if you need to keep track of their time, which I know you do, you know, use toggle, use some of the third party systems that are out there that are even free to use for single users in many cases, and they send you an invoice and a report of the time on a regular interval. All the things that make it easier to integrate a freelancer into your team are generally more likely to make them be classified as an employee as far as the IRS and most states are concerned.

And, and what is the consequence if, if we do get audited or somebody, and, and by the way again, litigious world Yeah. Unhappy employee picks up the phone or sends an email that says, you know what, my employer is working with babbette and they call ’em an independent contractor, but they’re in here every day and they’re on our equipment and they, they go to our company outings and blah, blah, blah, blah, blah. Yeah. Right? So it’s easy for somebody else to trigger, you think you’re flying under the radar, but understand your employees know what’s going on and so you get, you get one disgruntled employee and they make one phone call or shoot an email and now all of a sudden somebody’s knocking on your door.

So what are the consequences if, if someone comes in and decides that Babat is indeed really an employee?

Right? Well, area of consequence number one, taxes, income taxes. Oh, I, I freelanced for a BC agency and I thought they were doing withholding, you know, I, I haven’t saved money to pay my taxes and I didn’t realize that they weren’t paying into social security for me and they weren’t paying the employer portion of, you know, wage taxes. That’s scenario one, area of consequence number two, oh, you don’t need my services anymore and I don’t have anything else going on because I was giving you 30 to 40 hours a week.

And so I am gonna trot down to the unemployment office and I’m gonna file for unemployment because Yeah,

That’s, that’s happened a lot to our agencies. Yeah.

Yeah. I, you know, I need some kind of paycheck while I’m looking for my next gig and then the claim starts and that weren’t your employee as far as you’re concerned, but they, they feel like they were as far as they’re concerned. So that’s area of consequence number two, area of consequence. Number three, a contractor gets in a car accident, going to visit one of your clients on behalf of your agency. Okay. Is that a workplace injury and should I be compensated because I was doing it while I was providing services to you? Well, they’re not your employee. Right, right. But they feel like they were, because they were, they wouldn’t have been on that trip in the first place if it wasn’t something you asked them to do on behalf of your clients.

So that is, those are, you know, three of the top most likely scenarios that I think are risky for our agencies with I think the income tax one being the most likely, but unemployment is a close second. ’cause if you think about it, people do things for their own reasons and if the freelancer, you’ve welcomed them, you’ve made them part of the family, they’re part of the team, they have an email address that you know, ends with your URL, et cetera, et cetera. Yeah. They’re not thinking of themselves as separate and apart legally. And, and you don’t want them to, in many cases, let’s spend my design on your part as an agency. Right. Which I understand.

But those are some of the real risks that you face. And some of those risks are being mitigated because the states are just crashing down and saying, we’re, we’re, we are classifying them as an employee for you. Right. We don’t care what you called them and if you didn’t withhold taxes, that’s your problem to deal with when it comes time to filing. But, so

In other words, they’re gonna come back on you and say, okay, that person worked for you for the last two years. You Yeah. I mean you owe us payroll taxes for that. I’m assuming there are fees and penalties tied to that.

Yeah. Workers’ compensation insurance premiums in the states where that’s a factor. Unemployment

Company. Yeah. So this could get expensive in a heartbeat for an agency

For sure. And also, you know, are they holding themselves out into the world in a way that is with not within the scope of what a freelancer should be doing for you? Are they going out and, you know, engaging third party vendors for your agency? Are they acting like an agent of your business with authority to enter into contracts or, and at the end of the day, you know, you’ve got a vendor saying you owe us X, Y, Z and you’re saying, I didn’t order that from you. Well Sally did. Well Sally doesn’t work. You know? Right. So just think about it in terms of, of the way you, the

Exposure of risk.

Right. And you’re certainly not gonna be in a position to, if they screw up something, right, say to the client, they’re a contractor, you know, I’m as mad as you are client, they, it is their, no, they’re an agent of yours. You held them out that way. So there’s always been, you know, some of these risks and you mitigate them by having a good solid, independent contractor written agreement with the appropriate covenants. And, and I don’t like to give things more air than they need and I don’t like to make things more complicated than they need to be. But this is an area of risk for just about every agency. I don’t think we have a single agency client that doesn’t have independent contractors at

Some point. No, it used to, it used to be kind of a 50 50 thing, but I can’t, I hard pressed to think of an agency that doesn’t have somebody from the outside serving in some rule at some, at some level. Yeah. Yeah. So, alright, so that’s general rules around independent contractors. Now with the new FTC ruling, what needs, what do we need to update, change do to make sure that we are protected there?

Well, if you have a written independent contractor agreement with the independent contractors who are providing services to you, good for you. I applaud you. But you need to pull it out. Take a look at it. If it has a non-competition covenant in it, you need to follow the same procedure you’d be following with your employee and notify them that as of the effective date of the federal rule, the non-compete covenant is not enforceable in you’re acknowledging that alternatively you could just create a new contract, tell them the old one is void and this is your new agreement and it will not include the non-competition covenant.

But either way, you need to address your paperwork, you need to pull your paperwork out, you need to look at your processes for onboarding of contractors. And this is a good inflection point for you to see how compliant you’re being with any of those, you know, lists of troubled things that you could be doing. Right. Or avoiding and, you know, get yourself more squarely in compliance. And look, I, I think agency leaders need to understand that 50% compliance is better than 30% and 75 is better than 50 and so on. So if you’re not gonna get all perfect, get better to a hundred percent with each step that you take.

Well, and I think one of the things that I’ve always appreciated about your counsel, because you know, I certainly fall into the category that you described earlier, which is, you know, which, you know, ’cause we’ve worked together for years, but an entrepreneur who does not like to be told what to do.

No. Right.

So one of the things I’ve always appreciated is that you sort of help me, you’re my litmus test of okay, you really have to do this and or here’s, here’s the letter of the law far, far away is here’s what you would like to do, drew, here’s the middle ground where you at least are reasonably protected. And so what I’m hearing you say is this is an area where the exposure is pretty great. Yeah. And the cost of protecting yourself in terms of the documentation and how much effort and work it is, isn’t that great? So this is probably one where we would be wise to err on the side of, of covering our rear end a little more than we might like to do.

Yes. Because I feel like this is, you’re covering more than one base by getting this paperwork updated in order not only compliance with the new FTC role, but you know, being compliant with your state and its rules and, and just setting expectations with, and your employees will appreciate, they may not realize you’re required to do this by federal rule, but look, they’re gonna appreciate the honest conversation here. We know that non-competition covenants aren’t enforceable. We wanna remind you that there are confidentiality obligations you have here. You’re also subject to a non-solicitation covenant with us. And so it’s a good education opportunity and it’s, you know, I mean, agency leaders are communicators or they should be.

Right. Right. And so you’ll figure out the right way to explain this to your team members that is protective of them and protective of you and you’ll navigate around it. And yeah, to your point earlier, this is just a, a maturing at the federal level of what a lot of states have been doing over the last few years anyway, with respect to non-competition. Yeah.

As always, thank you for coming on the show and helping us unravel all of this and, and make it accessible to the non-legal mind. So I appreciate you getting up early this morning and and doing this with me. So as always, thanks. My pleasure. Thanks for being such good counsel for us and our folks.

We appreciate you and, and we love working with agency owners. They are, they keep us on the edge of our seats and they give us a front row seat. They do. And they give us a front row seat to tons of creativity and, you know, ingenuity. And so they’re a very fun audience to serve.

Yes. Fun. We’re, we’re gonna stick with fun. Yes. So if, if folks wanna reach out to you, Sharon, if they wanna find out more about the toolkits you have or get on your email list so they can be invited to all of those free q and as that you do, what’s the best way for them to do that?

Do that? Yeah, a few things. So we do quarterly q and as and they’re a little bit of content and a lot of therapy for agency owners. We get questions and answers. You reach out to me, [email protected]. We’ll make sure we get you on the list for those. Likewise legal and creative.com. We’ve got a blog with a lot of good content for agency owners. The Innovative Agency is a podcast that I host to discuss, not legal issues, but issues of innovation and sort of future looking for agencies in. We put an episode out usually weekly of that. And you can reach me at any of those places and LinkedIn is always a good place for us to connect as well.

Yeah. Awesome. Thank you again.

My pleasure. It was great talking with you, drew.

You too. Alright guys, this wraps up another episode. So as always, and I know that you hear me say this a lot is I like episodes that give us things to do or stop doing or do differently. I I, I don’t do these just to be philosophical. This is, I want these to be practical and Sharon made it very clear what we need to do to protect our agencies around this new FTC rule. So I would not dilly nor dally, this is not a heavy lift. This is some simple language changes, some simple contractual changes. So there’s no reason to expose yourself to this risk. The, the lift of protecting yourself is just not that great. And so it’s time to dust off your contracts with employees, with independent contractors.

It’s time to look at the language in your handbook and get those updated in compliance with this new FTC rule and just anticipate that it’s gonna go through and that you need to have new language that is appropriate to protect yourself and your team and your money and your clients and all the things. So don’t, don’t wait around and get that done. Okay. Alright. So big shout out to our friends at White Label IQ. They’re the presenting sponsor of the podcast. They do white label design dev and PPC. They’re born out of an a MI agency. So one of the things that’s awesome about them is they’re priced in a way that if you need their help, either you don’t have a dev department at all or maybe you just need an extra set of hands ’cause you’re super busy re priced in a way that you can still make money.

Which honestly a lot of you struggle to make money on dev products, even if you’re have a full team in-house. But they’re priced because they understand how agencies work in a way that is advantageous to you. And they can do simple things, super complex things. So check them out at White Label IQ dot com slash aami. As always, I will remind you that if you’ve never worked with them before at that website, you can find out how to get some free hours off of your first project. So lovely people, I highly encourage you to go check them out. So do that. And of course I hate to end an episode without reminding myself and you how grateful I am that you listen every week.

This would not be as much fun if I was just talking to myself or Sharon and I were talking and no one was listening. So thank you so much for being with us. I know you’re busy. I know you have a lot of, I know there’s a million podcasts, so we’re always really grateful that you keep coming back for more here and you keep coming back and I’ll keep coming back. That’s the promise. So I’ll be back next week with another guest to help you think a little differently about your business. Alright, I’ll see you then. Thanks for listening.

That’s all for this episode of AAMIs Build. a Better Agency Podcast. Be sure to visit agency management institute.com to learn more about our workshops, online courses, and other ways we serve small to mid-size agencies. Don’t forget to subscribe today so you don’t miss an