Episode 453

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The FTC has recently passed regulations against non-compete clauses on a federal level in all work contracts. Starting in the fall of 2024, agencies will have new rules to comply with regarding their employees and independent contractors.

This will be a big shake-up for many agency owners, but luckily, Sharon Toerek is always by our side to walk us through any new legal requirements that hit us unexpectedly. In this episode, she covers a lot of ground on how agency owners can comply with the new FTC non-compete rules for both employees and independent contractors.

We cover the difference between non-competes and non-solicitation agreements, how agency owners can prepare to announce these changes to their workers, and how we can still legally protect our IP and client relationships.

Sharon stresses that the quicker we start working on compliance, the better prepared we’ll be for when this goes into effect in a few months. So don’t delay — tune in to learn how this affects your agency and how to get ahead on compliance over the summer.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

FTC non-compete

What You Will Learn in This Episode:

  • What covenants are still legal under the FTC non-compete ruling?
  • What agency owners need to do to be compliant
  • How these changes will affect your freelancers and independent contractors
  • How to protect yourself if you’re selling your business
  • Non-solicitation agreements vs. non-compete clauses
  • Is the US ahead of or behind the times on this?
  • How soon agency owners need to prepare new contracts or to announce the changes to employees
  • Making sure your independent contractors are actually independent contractors
  • The consequences of misclassifying employees as independent contractors

“If you are concerned about protecting your secret sauce, or any other intellectual property, non-disclosure and confidentiality covenants are still absolutely enforceable.” - Sharon Toerek Share on X
“If you are selling your business and you own 25% or more of the business, it’s permissible to have a non-competition covenant in that purchase and sale transaction.” - Sharon Toerek Share on X
“This is as good a trigger as any to review the current state of your written agreements with your key employees and your handbook policies and procedures.” - Sharon Toerek Share on X
“We’re dealing with a worker culture where the newest generation of agency employees isn’t afraid to ask, demand, and confront when there's a policy that impacts them adversely.” - Sharon Toerek Share on X
“You'll be a lot more successful with a contractor if they're an LLC or an S-corp and the contract is between your agency and their company.” - Sharon Toerek Share on X

Ways to contact Sharon:

Resources from Sharon:

Resources:

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.

And then Agency Management Institute, all one word. Subscribe and search the existing video database for all sorts of actionable topics that you can implement in your shop today. Alright, let’s get to the show.

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 re