Mission to Grow: A Small Business Guide to Cash, Compliance, and the War for Talent

Brian: use this time wisely, right? You know, we often say that, but you know, 120 days is not that much time to prepare. Um, Don't assume any of these litigation challenges are going to be successful, you know, until you hear otherwise presumed, uh, September 4th is the deadline.

Mike Vannoy: The FTC has ruled on non competes. This is an area for businesses, this area of non competes. Uh, I think, I think increasingly over a multi year span, non competes have been less and less. Uh, enforceable, uh, but now the, the FTC has, has weighed in and the rules are pretty black and white. I think there's some important ramifications here for business owners, uh, that we need to understand.

Uh, got the perfect guest for it. Uh, uh, if you're a regular watcher of the show, you know who this is. My guest today is an attorney. He's got extensive experience defending class and collective action lawsuits under federal and state wage and hour laws. His practice focuses on representing employers in a wide range of workplace matters.

As well as preventative advice and counseling. He's successfully defended wage and hour audits conducted by the U. S. and New York State Departments of Labor, and he regularly handles cases before courts and administrative agencies involving claims of discrimination, sexual harassment and retaliation.

Please welcome back to the show, Principal at Jackson Lewis, Brian Shanker. Welcome, Brian.

Brian: Thanks for having me, Mike.

Mike Vannoy: All right. So what's the big news with the FTC, as it relates to non competes? Ron,

Brian: for years, non competes have been under attack, but really at the state level, uh, this is the first significant, uh, you know, federal action we've had. Uh, and basically on, April 23rd, 2024, the FTC issued its final rule, which broadly prohibits, non compete agreements for employees, uh, essentially at all levels, with only very limited exceptions.

Uh, so specifically the rule bans, uh, new non competes with all workers, including, quote unquote, senior executives. You know, after the, uh, effective date, uh, of the law, um, you know, we'll get into that, uh, a bit more what, you know, the intricacies of the rule. Uh, but as far as the effective date, uh, it's set for 120 days, after the, publication of that final rule.

So, uh, as of now, we're looking at an effective date of September 4th of this year. Uh, though of course that could be impacted, by legal challenges. Uh, which we'll also get to, as we've seen, uh, often when, uh, federal agencies are, uh, issuing, uh, employment rules these days, uh, we do get legal challenges, and so there's often a delay, um, but,

Mike Vannoy: will the effective date be based on any non compete that's out there, or does this establish a new starting point? So, can old non competes for existing employees, uh, will they still be enforceable, or does this kill everything retroactive as well?

Brian: so great question. Uh, with the exception of senior executives, and we'll get to, you know, who they are, that's a narrow exception, that, uh, Yes, any non compete that was entered into, uh, prior to the rule or after would be barred, right? Prohibited. Uh, so no, you know, even if a company entered into a non compete, uh, with an employee other than a senior executive, uh, you know, prior to the effective date, uh, it will be, uh, unenforceable, uh, post effective date.

Um, and so, you know, that, that's, you know, very important to understand. Um, look, the, the FTC, you know, they stated, you know, some, you know, some strong bases for this rule, though, uh, from the employer standpoint, there are a lot of reasons, uh, you know, that there will be challenges, uh, but really, you know, the FTC, uh, found that non competes, you know, significantly reduce workers wages, uh, their And studies so to speak, uh, or their estimate is that, uh, the final rule will increase workers earnings by 250 billion per year as a result of the, uh, taking away of the, these non compete restrictions.

Mike Vannoy: 250 billion, so what's the Is the assumption there that people were not able to take their industry experience with them and go get high paying jobs? They had to take lower paying jobs. Is that the rationale there?

Brian: Right. And I, yeah, so there are a number of reasons there. And I think, right, one of them could also be that, you know, non competes reduce competition for jobs, which, you know, certainly then keeps, uh, compensation down and that, you know, often jobs don't open up because, uh, as the FTC, you know, contends that an employee subject to a non compete won't leave that.

So there's less competition, less movement. Um, you know, it could stifle, uh, the creation of new businesses, uh, right? I think the, uh, yeah, the FTC, you know, believes this will, you know, result in new business, you know, startups, uh, from people otherwise, you know, barred from competing with a prior employer. Um, and they've also estimated that, uh, it'll grow over 8, 000 jobs.

Um, so the FTC is identifying some, you know, big impacts, uh, as the rationale for, uh, you know, for putting through this final rule. Um, now obviously the FTC

Mike Vannoy: I'm stay on that one for a second. So it makes sense to me. If, uh. If you were prevented from leveraging your industry experience to go find another job, you might have to take lower paying jobs. So that makes sense how this could result in more income for employees. Um, it, it, uh, by having the non competes prevents people from competing for jobs, which, uh, gives the employer more leverage for a smaller talent pool.

So that would make sense. Um, the last part you said, I'm not understanding how, how that one works. Can you, can you say more?

Brian: Sure, you mean the creation of, uh, jobs and

Mike Vannoy: Yeah, right.

Brian: Yeah, so I think what the, what the FTC is assuming is that, you know, You know, he's not, you know, people subject to non competes in the U. S. And they estimate, you know, again, this will impact about 30 million people. Uh, is that not only would these other people go to other positions, create more competition for positions, but, you know, non competes also restrict individuals from, you know, starting their own business.

So the FTC is viewing non competes as. You know, a, uh, um, something that's blocking, you know, new businesses that would hire additional employees. So I think that's how they're, you know, seeing that, um, you know, new business creation will

Mike Vannoy: So a new business formation that makes, that makes a lot of sense. Cause that's, I mean, people learn their craft working for someone else and then they go hang a shingle up for themselves and build their own business. So, so that, that does make sense. So, so the, whether, so whether you love or hate this new ruling.

Uh, the justification is increased wages for employees and job creation. That's it in a nutshell, right?

Brian: Yep. And look, we'll, you know, there are certainly employer concerns, right? Uh, how are we going to, you know, uh, protect our trade secrets and other important information? And, and we'll get to that, you know, after we go through, you know, exactly, you know, what, uh, you know, compliance with this rule, uh, takes.

But, uh, yeah, you know, it's just going to be, um, You know, an obstacle for employers, something that you need to understand. But, you know, as we'll discuss, it doesn't ban all restrictive covenants. Uh, and, and so there could be the use of non disclosures, non solicits, uh, and we'll discuss, you know, how those could be implemented, uh, to still, you know, uh, help, you know, uh, meet the employer's legitimate needs.

Uh, when it comes to restrictions, but while also not running afoul of this, uh, this final rule.

Mike Vannoy: Got it. Got it. Okay. Um, so maybe take us through more details of what the, what the new rule says. What, what, what, what's included, what's not included, who is the impact, et cetera.

Brian: Sure. So, yeah, as we started off, the rule broadly bans non compete clauses. And I think that, you know, as an employer, you should think of it as a non compete clause, because one of the, things that the final rule points out is that we're not talking just about non compete agreements. This can be anything that speaks to a non compete found in, a handbook, an employment agreement, um, you know, any policy doctor, uh, document, that, you know, that places some restrictions.

So, it's, we shouldn't think of this as typically, do we have a non compete agreement? It could be found elsewhere. Uh, but basically, after the effective date, so right now that's September 4th, it'll be a violation for a company to enter or attempt to enter into a non compete, uh, enforce or attempt to enforce a non compete, uh, or represent to a worker that they're bound by a non compete clause.

Um, and again, there's an exception here relating to senior executives. retroactive

Mike Vannoy: somebody, so somebody has an existing, uh, non compete in place. And the employee hears about, uh, this new ruling. Hey, I'm not bound to this. And the employer does anything to try to say, no, no, you, you know, this, this is only for new, this, this doesn't apply to us, you're still bound by this. You signed it.

Uh, that, that's a, that's a no go punishable, I assume

Brian: Right. That's going to be a violation. And as we'll discuss, there's actually an affirmative obligation on the companies to notify, uh, employees or individuals subject to a, uh, non compete that's already been entered into that will be, uh, prohibited by the rule that you have to provide notification to those workers, uh, that.

their non compete is no longer enforceable. Um, so right. It is, uh, very specific in terms of retroactive effect. Um, and, and so really, uh, if a company maintains a policy of, you know, trying to enforce, uh, non competes or, you know, continuing to enter into them post the effective date, that'll be, you know, very problematic and, you know, a violation here.

Um, But, uh, you know, as I stated before, the definition of a non compete is very important to understand because we're not just talking about non compete agreements. So a non compete can be a term or condition that prohibits or a worker or penalizes a worker or here's, here's the real, uh, uh, just that, or functions to prevent a worker from seeking or accepting work after, uh, employment.

Mike Vannoy: You hit a very legalistic clause there. So tell us what that means.

Brian: yeah, so what does it mean? So number one, the, the non compete needs, uh, would be tied to termination of employment, right? so, you know, if we're talking about a, you know, non compete during the period of employment, you know, that's okay, right? It's okay to say that workers can't.

Uh, compete with the company while they're working. That's, you know, in many states, there's a common law of duty of loyalty. So this is really just focused post employment. Um, yeah. And, and what does this mean, right? The functions, uh, to prevent, right? So, uh, a worker from seeking employment. So, Yeah, it's interesting, right?

The, the FTC hasn't necessarily been clear on whether that's, you know, an objective standard or a subjective standard, right? Meaning that objectively are, you know, does it run afoul of the rule if the provision actually prevents the worker from seeking or accepting employment? Or is it subjective in that if the worker believes that the provision prevents them, uh, from, you know, seeking competitive employment?

You know, is that a violation? Um, so some things we don't quite have answers to yet. Uh, we are getting guidance from the FTC as things go on. Uh, they just had a webinar, uh, the other day where they're continuing to provide some guidance. Um, but you know, look, in terms of documents or terms that could contain non competes.

Look, it's possible that non disclosure agreements, right? So, uh, companies should take a look at their non disclosure agreements. Uh, you know, depending on the wording of those, uh, you know, there could be, you know, wording in a non disclosure agreement that this is an example the FTC has used that, uh, bars the employee from disclosing to any future employer any information that's usable or relates to the industry in which they work.

Right? And so, something as broad as that could prevent that employee from going to work for a competitor, even though that's language found in a non disclosure agreement. So

Mike Vannoy: Can you give maybe some, some, you know, some obvious extremes so we can understand the difference here? You know, uh, I'm assuming, um, if I'm a machine operator, I've learned how to use, uh, uh, a mill. Um, and that's a transferable skill. And so, uh, uh, you can't prevent me. I'm not sharing your trade secrets by using some mill or some lathe or some piece of equipment that is industry standard that manufactures sells to plenty of other people, but how to manufacture a specific part might require proprietary knowledge.

Would that be an example of the separation we're talking about here? Yeah.

Brian: yeah, well, you know, and that's the tough thing, right? Because trade secret protection is going to take a backseat to compliance with this rule. So, you know, look, that's certainly going to become an issue, right? Where, like you said, you know, a company teaches, uh, or trains, uh, you know, a mechanic or some person on how to operate a specific machinery.

And, you know, look, you could have a non disclosure, uh, trying to prevent them from taking that knowledge elsewhere. But the practical effect of that could potentially be a non compete, something going to, uh, um, you know, be considered, you know, a non compete, you know, functions to prevent a worker from accepting work after employment, right?

So, you know, that's why there, there's so many iterations of what could be, um, you know, in non disclosures that, yeah, I think it's very important for companies to look at their non disclosures and not just assume, hey, this is a non disclosure agreement. We're fine. It doesn't run afoul of the rule because it's not a non compete.

Look, if it's a, you know, very, you know, vanilla, bland, uh, you know, um, non disclosure, not going too far, look, probably we'll be okay. Uh, but as we know, look, lots of employers like to work, you know, better protections into their agreements, and so, right, non disclosures can potentially be an issue. Um, but there are other standard types of, uh, agreements or documents employers enter into that could run afoul of this rule, too.

Um, things like training repayment, uh, agreement provisions, uh, where, again, depending on, you know, rules of the state, the, uh, employee is agreeing to repay, you know, certain retraining, uh, training costs, for example, if they leave, you know, within a certain time period. Those are typically fine, but if the repayment perhaps is not, you know, reasonably related to the actual cost of the training, you know, the FTC has indicated it might find, you know, a training repayment agreement, uh, to run afoul of, you know, that non complete, uh, non complete ban.

Um, and of course, right, we discussed that non solicits are probably going to Uh, the focus of employers who want to maintain protections, especially, um, you know, potentially over trade secrets. Um, but you know, an overbroad non solicit, uh, could potentially be, you know, essentially the same thing as a, uh, non compete.

Mike Vannoy: Just at the highest level you can't it's gonna be illegal and it already is in some states I want to talk about that in a minute But it's gonna be illegal nationally at the federal level FTC to have non competes. So you can't prevent somebody from going across the street to your competitor. You can't prevent them from opening their own business in that industry.

You can't prevent them from doing similar work and prevent them from keeping a living. So that's set. Um, I'm assuming most non solicit, non recruit agreements As long as they're relatively vanilla are going to be fine. It's like, okay, yeah, you can open up a competitive shop across the street and compete against me, using the knowledge you've accumulated over, your career working for me, but you can't steal my employees and you can't steal my customers from me because you have that, that, that's, that's an unfair advantage.

Is that a fair general line?

Brian: yeah, yeah, I think so. Um, and look, but, and I think. You're right. And so look, you know, I would know about, you know, the ones I've drafted. I know, right. We don't go too far. Those should be good. But again, you know, employers should just go back, take a look at it because, you know, having reviewed, you know, uh, restrictive covenant agreements from employers, you know, in various disputes.

Sometimes employers get these, you know, from attorneys, sometimes they're, you know, getting them online or from elsewhere. And so, uh, you see a whole range of these. So I think it would just be good guidance to an employer that, you know, you really need to consider and look at any restrictive covenants you have.

Don't just assume those, uh, non solicits will, you know, pass muster.

Mike Vannoy: can you give, give an example of something that you think is probably. Too far.

Brian: yeah, so look, I think in terms of a, you know, a non solicit, um, they're, they're often tied to the facts of the case, right? But, you know, you could see a situation where, you know, we're talking about a specific, you know, geographic area and, you know, essentially the non solicitation of, you know, clients or, you know, customers, you know.

Based on what that employee did, it could basically restrict them from working, you know, in that state, right? Maybe, you know, the company they're coming from services, you know, almost has a monopoly, right? Or deals with

Mike Vannoy: So, so maybe I can, maybe my, uh, my, uh, uh, restriction could say, you can't call on our existing customers that you directly work with for a period of time, uh, but it can't go so far as to say you can't call on any customer in this state because we're the number one provider of X in this state,

Brian: right, and we've, we've contacted those people already. You can't, you know, right, and that's why Yeah, very much. I like the non solicits that tie it into You know, sometimes you put it in the last, you know, six months or a year of your employment. You know, the customers that, you know, you solicited during that time, right?

Those are the ones you can't go. So,

Mike Vannoy: I know we could come up with a million edge cases, but is it safe to say that, uh, the non solicit, non recruit, it's really two buckets. Yes, you can go across the street and start your own company that competes against me, but you can't steal my customers, my employees. It really is those two things primarily, isn't it?

Brian: Yeah, Absolutely.

Mike Vannoy: Yeah. And so, so let's talk about each of those individually. Um, customers. Yeah. Where do you think the courts are going to land as these edge cases get litigated? Um, you can't steal my customers. Okay, well your customer, they saw my ad and they called me. Um, or maybe I did proactively try to get them, but it was after a reasonable time period.

Where do you think the lines are going to be drawn there?

Brian: Yeah, so, you know, it's interesting with non solicits, right? Because, you know, the state, you know, state and federal trends have really focused on non competes. Yeah, absolutely. Uh, and so, you know, oftentimes, you know, non solicits are looked at a tier below that and they're, you know, subject, you know, to pretty good enforcement, uh, more so than non competes because oftentimes, you know, and again, this is very much state dependent, but oftentimes courts are looking at it's a less, uh, severe restriction, uh, and so it's found to be, you know, more reasonable and, you know, enforceable.

Um, but yeah, I think when we're talking about those non solicits, you know, it's really the question that a company should really ask themselves is, you know, is this agreement, are these provisions going to, uh, preclude this person from working in our industry, in this industry? Uh, if it gets close to that area, then it's getting potentially into that area where it might be considered a non compete term.

Um, but yeah, I mean, certainly companies should not be afraid, uh, to use non solicits and non disclosures. Uh, but just, you know, we, we need to be, you know, aware that you can't use a non solicit, you know, as a disguised, um, you know,

Mike Vannoy: Yeah, I can, I can see that. Cause I could say, okay, no, you're free to work and compete against us all you want, but you just can't call on these 15 customers. Well, maybe it's such a niche industry that 15 customers is the industry, right?

Brian: Right. And so that's why oftentimes it's, you know, very, uh, fact specific when, when you're talking about that, because. You know, the geography of where this industry is, where the customers are, you know, that all, you know, is taken into account. Um, you know, so it's tough to say those, you know, broad, uh, suggestions, you know, without having those facts, but, you know, that's why you have to consider it and understand what the practical impact is of the restrictive covenants that, uh, you're going to enter into or, you know, seek to enforce.

Uh, you know, after the effective date,

Mike Vannoy: Yeah. Right. Right. it would seem to me a little more hairy, just my own personal life experience. Um, it seems that when people are going after customers, that's a little more egregious. And you know, pretty common to see a cease and desist kind of situation. Um, quick calling on our customers after people just left and trying to steal business away.

It's the employee area that seems to get more gray. Um, very common, you know, you, you, you hire a great employee, a great manager maybe, and, uh, they left their employer for a reason and, uh, you know, All the employees there liked that manager and they also share the same reasons they might want to leave that employer.

It's like, okay, these, these guys are calling me. I'm not recruiting them, but they're coming to me. It's like, how would you advise employers to think through situations like that?

Brian: Yeah, I think, I, I mean, look, it remains to be seen, but I, I do think that non solicitation of employees, uh, could, could potentially run afoul of this, right, because that could, one could argue, you know, that could prohibit a worker from, you know, or prevent a worker from, you know, accepting work, right? Uh, or, or seeking work, um, you know, it's, you know, a tough spot to say, but yeah, I, I think that's certainly something, um, that could be a, be a concern under the rule.

Um, you know, one thing that I think, you know, employers can do, uh, and, and, You know, this happens from time to time is that, you know, employers enter into, you know, garden variety, uh, these kind of garden, uh, you know, variety, uh, um, situations, right. Where basically, you know, what they're saying is, you know, it's not a non compete, right.

It's a garden leave where you're basically paying someone to not work. Right. Uh, where, you know, it's, the person is going to stay home, they're getting paid, they're still an employee. Uh, and so that's fine. So under the FTC's, uh, preamble of this final rule, they've indicated that that type of, uh, leave situation could, uh, could pass muster, um, as long as there's still an employee, but that can raise the issue, right.

You're paying, let's say you've agreed, we're going to pay you for three months to sit at home and do nothing, right? It's almost a, a form of a non compete period, but they're still an employee. So I wouldn't run afoul of the rule, but then you wind up in a situation where what if that employee then says, all right, I quit, I'm going to go work for a competitor, right?

Well, now you can't bar them from doing that because you can't do a non compete. And, you know, what would be the remedy there? You don't have to, you know, is the remedy, you don't have to continue paying, uh, them for, you know, sitting around or, or something else. So, you know, there are some unanswered questions.

There are some creative solutions, uh, you know, that employers can, you know, start thinking about here. Um, but, you know, I think we're going to certainly get more guidance as this goes on because there certainly are, you know, unanswered questions, um, you know, with respect to what type of, you know, restrictions really do violate the non compete definition.

Mike Vannoy: lots of gray area, but I think we get the basics here. You can't prevent people from working. You can. Uh, have non, uh, non solicitation, non recruiting. It's primarily, I mean, there, there could be other buckets, but the big ones are, uh, going after customers, going after employees, um, and you can probably still do those things that I'm sure that they'll be tested in courts where the lines end up being drawn, but for the most part, your non solicit can't inadvertently become a non compete, right?

So that makes sense. What about exceptions? You mentioned executive exceptions. Maybe rattle off, are there specific categories here? Um,

Brian: absolutely. So there are a few, uh, exceptions, uh, that we should get into. And at the beginning, you heard me say, uh, the term senior executives. Uh, that is one exception, uh, that, that we can go through now. Um, there's another exception to the non compete rule involving the sale of business. Um, and so those are, those are the two biggest ones.

So, you know, starting with this senior executive exception, right? So what the final rule says is that you cannot enter into any new non competement business. Non compete agreements with all workers following the effective date. However, if the company entered into a non compete agreement with a senior executive prior to the effective date, that can still be enforced after the effective date.

Mike Vannoy: So, so there is a grandfathering for senior execs, but even with senior execs that go forward, you can't do new ones. Is that

Brian: Right. Exactly. So, and look, we're still in the period, you know, pre, uh, you know, uh, uh, effective date. So conceivably companies could even enter into non compete agreements with these, uh, senior executives. Now that would still be enforceable

after the effective date. Um, you know, that could be a strategy, but this, uh, This is a more limited exception than one might think, you know, the term

Mike Vannoy: I was, I was going to say clearly this can't be good news. Uh, you just got a promotion. You're now a senior executive, right?

Brian: Right, right. No, and

Mike Vannoy: you can't work in this industry to infinity, right? Okay.

Brian: right. No, and that's why they they've really, uh, made this a very restricted exception. So number one, uh, for someone to qualify as a senior executive, uh, they need to earn over 151, 000 a year.

Mike Vannoy: Okay.

Brian: So number one, that's a, that's a high level, uh, that, that includes most, uh, compensation.

However, the FTC, uh, on their, uh, recent webinar, uh, they just indicated that, um, There's certain, uh, there's certain compensation that wouldn't, um, necessarily be included in, uh, in that 151, which, uh, it could potentially not include payments for medical insurance, uh, contributions to retirement plans or other fringe benefits.

So we'll have to pay attention to that because, you know, especially when we're talking about, uh, high level employees, you know, often

Mike Vannoy: think it would, would it include commissions? Cause there's, I mean, this is obviously a good job and high, high paying job, but there's lots of sales positions that make more than 151.

And I don't think I'm all sales reps and senior execs. Some are, but not

Brian: Yeah. Well, but here, here's the catch, right? So in addition to that 151, the other requirement is that this person be in a policymaking position. So there, the FTC is really envisioning very high level, like the CEO, uh, or any, or another officer in the company who's making, uh, decisions that control, you know, significant aspects of the business.

Mike Vannoy: So that's, that's the big one. It's, it's policymaking. So you could be at a, you could be at a, is it an either or, or is it an and? Cause I can see you're at a startup. And you're, you're employee number three, and there's only five of you. Everybody is a policy impactor, but maybe you're not making that much money yet.

I

Brian: Right. So it is an end. So, right. You have a policy making position. And yeah, I mean, look, I think this is going to be one, uh, that is construed very narrowly. Um, but I think companies would be, you know, well suited to look into this and try to determine, you know, which of their, uh, you know, executives could fall in this.

Because certainly, you know, there's a, only a limited amount of time to, you know, if you don't already have a non compete with such an individual. You know, to enter into a new one. Um, so, you know, that's, that's a potential option. Again, it is an exception, not, you know, it's really going to be our top, top, top level people, um, you know, in the organization.

Um, and then, uh, look, the other, the other, uh, exception, the other big exception under the rule, uh, is that this ban on non competes don't apply, does not apply to a bona fide sale of the business. Right. So if you're a business owner and you are selling, you know, your, uh, your ownership, you know, some or all of your assets, uh, in the business that.

You, you know, you can then be subject to a non compete, right? Oftentimes, right. You buy, you buy a company, you don't want the person who sold it to you going out and opening up a new competing business, right? That's part of what you're paying for. You know, they're the goodwill of the business. And, you know, if that person goes and starts a new one.

You know, the, a lot of the value of that deal is potentially gone. So, uh, this is a, you know, a good exception for employers. In the proposed rule, way back in 2023, uh, there had been a, uh, they had had a requirement that the person be at least a 25% owner in the company. Uh, now that's not required. So, you know, I could own 1 percent of, uh, the company when I sell it.

And then, you know, I'm permitted to be subject to a non compete, uh,

Mike Vannoy: So, but only for greater than 25 percent owners. So I like it real

life.

Brian: that was in the proposed rule. That's not in the

final

Mike Vannoy: so so some use cases I've, I've seen plenty of times, uh, a business buys another business. And, uh, the employee, so the owner. I've seen that where owners I'd say didn't necessarily play nice and they participated in kind of pulling customers away and, and, and bad mouthing, Oh, these new, new owners are terrible.

Um, it seems probably that that kind of a non compete is going to be covered, but I've seen probably the greatest damage is employees. Employees who leave, Hey, I'm not on board with this arranged marriage. I hired on with this firm, not the acquiring firm. Uh, and, and they're the ones that are peeling customers off and taking employees with them and a business can evaporate pretty quickly.

What, what, uh,

what, what,

what,

Brian: No, you're, you're absolutely right. And, uh, you know, that is something right. You can, this, this exception does not extend to the employees. Um, you know, and that, that's a good point. Uh, and that was something that was specifically pointed out that in the sale, it's only applying to, you know, the, uh, buyer could only require, you know, the seller, the owner's, uh, selling entity.

Um, you know, but look, there, there are, you know, and look, there are some unanswered questions here because, uh, you know, one of the things we often see, uh, with a sale of the business is that, you know, one of the, you know, sel the selling owner, right, they often are, you know, You know, stay, stay with the business, right?

That there's an agreement that they're going to stick around and, um, you know, work for the business for, you know, a couple of years or six month period, something like that to help transition. Uh, and so, you know, we often have agreement, you know, uh, non competes that say, uh, that have this, you know, employment related tail that say, you know, the non compete, uh, you know, will be for a period of, you know, six months from termination of employment or three years from the closing of the deal, right?

And that, you know, probably doesn't work because there's a tie to the, uh, termination of the employment for that, uh, you know, for the seller. Um, So, you know, it can, it can be interesting. I mean, look, there, there are other, you know, issues when it gets to the, you know, uh, ownership, right? Uh, you know, some companies, uh, have, you know, phantom stock, right?

Uh, now I'm not, For the record, I'm not a corporate attorney here, but I have some knowledge of these things. So, you know, phantom stock is, you know, I mean, it's basically, uh, stock, these shares of stock given to employees typically that doesn't involve ownership of the entity, uh, but, you know, the shares provide other, you know, other benefits.

Um, You know, so there's a, you know, there could be a question of, you know, whether, you know, you have to be an equity owner or would an owner of phantom stock who's selling that, you know, who's selling the phantom stock be, you know, permitted to have a non compete? Um, you know, so yeah, there are lots of questions here.

Um, and you know, sometimes there aren't answers. I mean, again, there could still be restrictions under state law, uh, you know, for some of these that might, you know, tell us yes or no, where, you know, the FTC uh, you know, rule doesn't address it. Um, but yeah, with the sale of business, um, you know, there, there, it's a good broad exception, but there's still going to be, you know, many questions to say, you know, what can occur there.

one other, one other exception I wanted to note, Mike, is that if a, and this isn't necessarily an exception per se, but it's, uh, it's the ability to enforce, uh, violations of non competes that occurred before the effective date. Meaning, assuming September 4th is our effective date. If you're an employer and you have an employee subject to a non compete and, you know, in August of this year, they, you know, violate that non compete, they, you can go after them for that, right?

You can pursue, uh, an action in court, a remedy, that's fine. And even if, even if that continues after the effective date, that's fine. You can still enforce a violation of a non compete that occurred, uh, before the effective date.

Mike Vannoy: Okay. That makes sense. Um, you made mentioned Brian about other areas like nonprofits and franchises. Uh, are there special rules for certain industries or business classes?

Brian: Yeah. So, so potentially, right there, you know, potentially there are, there, there are some other, uh, issues such as, right. Um, not nonprofits is one, right. Where the FTC has jurisdiction over, um, a lot of things, but, uh, they don't necessarily have a jurisdiction over a nonprofit entity. And so an area of ambiguity and likely an area that will be something that will be challenged is the extent of the applicability of this final rule to non profits.

Um, you know, they, they typically would not be subject to the FTC act as a non profit, but it appears that the FTC is taking a position that even if an entity is, you know, registered as a non profit, um, You know, that it could still be subject to the rule if it's engaged in profit making enterprises or profit making as profit making members.

Now, without getting into all that, what I, what I think we gather from this is that the FTC is probably referencing many healthcare companies with this that may technically be non profits. Um, but you know, they, they may want the scope of this to apply to them. So, you know, we can see that you will probably see is, you know, time passes.

Various issues within specific industries. Um, but nonprofits are certainly one we'll, you know, we look

Mike Vannoy: And that's interesting. It's because most nonprofits, I was going to say most behave an awful lot like regular businesses. That's not totally true. Uh, but there are plenty that do. Um, So it's probably not most, but there are certainly plenty that do. But this is, it's simply because the FTC does not have authority over nonprofits.

Brian: Right.

Mike Vannoy: really interesting.

Brian: Um, and then, yeah, another, uh, one of the, uh, the issues that, that, uh, You know, it comes up here is, uh, you know, non-competes between franchisors and franchisees. Uh, right. And so the rule, the FTC has indicated the rule will not categorically ban non-competes between a franchisor and a franchisee, right?

So we're talking about, you know, the franchisor, the national company and the franchisee, you know, which runs, you know, the local, you know, retail store. The franchisee is agreeing, right? We're not, you know, the owners, they're not going to compete, uh, you know, outside of, you know, the ownership of that franchise

Mike Vannoy: So if I'm McDonald's, I can still prevent my franchisees from setting up Burger Kings.

Brian: exactly. So that's why, yeah. The FTC has excluded the franchisee franchisor relationship that said . They do, uh, they do note that, uh, franchisor, franchisee, non-competes. This may present some concerns, uh, that could run afoul of state, uh, laws, antitrust laws or, uh, the FTC Act, but, you know, they haven't, you know, besides that general caveat, they have not indicated that they'll go after those.

Mike Vannoy: Got it. Got it. Any other major exceptions we should talk about here?

Brian: No, I, you know, I think those, uh, I think those are really the, You know, the major ones that we just went through between the, uh, the senior executives, the sale, these franchises, um, yeah, that, that's

Mike Vannoy: Let's talk about, uh, uh, enforcement. So how does, how does this get enforced? Um, what bad things happen to people who don't comply. And we probably have, probably have some good models. Look at California, like, I don't know how, how long it was California, uh, uh, uh, right. Yeah. That's been a little bit now. Right now, I think the, the only difference here, right, is that this is coming from, you know, the FTC. So I mean, basically, If a company violates this rule, then it's a violation of section five of the FTC Act. Um, and so, uh, you know, violations of the FTC Act, right, that'll go before the FTC, and that can result in, you know, fines, uh, penalties, um, you know, injunctive relief, right?

Brian: So if a company's. Uh, you know, issuing non competes or doing anything, right. You can get an injunct, you know, an order saying you can't do this. You're barred, you're prohibited from doing this and any violation of this, um, you know, we'll subject you to further, you know, penalties. So I think it's, you know, it's unclear at this point, you know, exactly the extent of these, uh, penalties, exactly, you know, what they will entail for, you know, different violations.

But

Mike Vannoy: it safe to say though, that FTC is not going to come knocking on your door and do an audit? Like, uh, uh, immigration or, uh, the department of labor, they actually could, and then it happens probably not getting random FTC audits.

Brian: No. That I, I . Yeah. I

Mike Vannoy: assume most of these things are going to manifest where an aggrieved employee, whether they're right or wrong, they're going to hire somebody like you to come after the employer in this thing, we see it unfold in court.

Probably. Right.

Brian: Right, right. And to be clear, someone like me who represents employees, not someone like

me who represents

Mike Vannoy: yeah, I'm lumping all you evil lawyers into one bucket. Yeah. Yeah.

Brian: um, but yeah, you know, that's, uh, yeah. Essentially what would happen, I mean, the FTC in general, the way they operate is their complaint based agency, right. So, uh. You know, an individual, a consumer, whoever it may be, comes with, you know, a complaint, it gets investigated, handled within there, and there, there's a resolution.

So that's, uh, that's typically how the FTC operates. So, so yeah, that, that's, um, you know, how we would see this work. Um, but, uh, but yeah, it's, it's going to be interesting. I mean, you know, once the, uh, effective date comes, you know, there's There is no honeymoon, right? We're, we're essentially in the honeymoon period right now.

Um, there is no period of time once the, the rule becomes effective, you know, that, that, you know, the FTC will look the other way.

Mike Vannoy: Brad, I don't want, I don't want to unnaturally scare folks, uh, about what the risks are here, but like this, I assume we can use California as a good example because it's, uh, non competes been in illegal there for quite a long time and so, uh, clearly there's going to be cases where employers violated employees sued or reported.

What kind of. What kind of costs, what kind of impact are we talking about here? And I, and it's probably too early to be super specific, but I want people to get a sense for like, okay, you know, are we talking a hundred dollar fine? Are we talking a hundred thousand dollar fines? Are we talking, uh, these things are really expensive to, to defend.

I mean, give it, give us a, uh,

Brian: Yeah. So, I mean, look, I think that there, there are a few things that, that we'll likely see, right? One is that, What we'd expect is that you're not going to have one offs, right? That if you have non competes that you're entering into your post effective date, you likely didn't do it with just one person.

So I think that's one thing to consider that, you know, often these violations of the rule are not going to just apply to one employee. It could apply to, you know, a whole category of positions at the company. You know, we're talking, it could be 10, it could be dozens. Uh, and so you might not be dealing with just one violation.

It could be multiple violations. Um, you know, so I think that that's something to consider. Um, look, there is. Um, a good faith, uh, I believe it's a good faith exception, uh, you know, in the rule. Um, and I think that is, you know, mainly tied to the, uh, the senior executive, uh, issue, right? Because senior executive, if you've in good faith, um, made the determination that, you know, who's a, uh, executive and, uh, you know, who isn't that, you know, they're not going to try to, you know, you know, necessarily kill you on that.

I mean, certainly it could be a violation, but if the company has a good faith belief that the rule is not applicable, uh, then, you know, they might be able to avoid, uh, you know, a penalty in that situation. Uh, again, we're not clear on what needs to be shown in terms of good faith, uh, belief. You know, if we look at the Fair Labor Standards Act, that could require, you know, a company to seek legal advice, uh, in order to, you know, take, uh, advantage of that.

Um, but certainly, I think when it comes to identifying senior executives. You know, document the process and why you're making the determination who is a senior executive so that if you get it wrong, you know, you might be able to take, uh, um, advantage of that, uh, exception.

Mike Vannoy: Got it. Got it. Um, let's maybe wrap on, uh, being, let's be proactive. What, what should employers do? I mean, the, right from the jump, uh, you'll, uh, see if I don't butcher the phrase, uh, treat your employee, uh, train your employees so they can go anywhere they want, treat them well enough that they'll never want to leave.

I, that, that seems to really apply. more than ever in this new world. What, what, what would be your guidance for employers other than, Hey, you can't do non competes anymore?

Brian: Right. So, you know, first off, use this time wisely, right? You know, we often say that, but you know, 120 days is not that much time to prepare. Um, Don't assume any of these litigation challenges are going to be successful, you know, until you hear otherwise presumed, uh, September 4th is the deadline.

Mike Vannoy: Yeah.

Brian: So what are we doing?

You know, review your agreements and, you know, again, not just agreements with employees, with independent contractors, right? Anyone who's subject to a non compete is covered. So, you know, this could be, you know, anyone. And, and as we discussed before. Don't just look at non competes, right? Look at non solicits, non recruiting agreements.

Mike Vannoy: Brian, you're reminding me of something that I was skipped over here that we need to talk about, which is notification. So, so this can't be set in my hands and do nothing until September 4th. And I'll just deal with that because if you have them in place, you have to notify here, right? So there actually is something that, that is very actionable for employers.

Brian: exactly. So what companies should be doing with respect to that notice requirement, right? Ensure you have up to date contact information for your current employees, right? And, uh, look what, uh, contact information you have available for your former employees. Get that ready because you're going to have to send out notice.

Uh,

under

Mike Vannoy: so, so say more about that. Um, so it makes perfect sense to me. You got to notify your current employees. You probably have contact information from them because you know, you're, they're getting paid. Um, what's the requirement for former employees? How far back do you have to go?

Brian: Right. So, as long as you have their contact information, they should be notified. So, if they're still subject to a non compete So, look, if you have a restrictive covenant that had a non compete for one year, and were three years down the road, right, you don't need to notify that person, uh, because by the terms of the non compete, It's there, they'd no longer be bound by it.

So, um, I, I

Mike Vannoy: So you're, so you're, obligated to notify anybody who's impacted based on the, uh, the rules and that you, that you laid out in,

Brian: so yeah, presumably, because, you know, what the rule says is that by the effective date, and so that's the key, right, by the effective date, you're providing this notice to any employees who entered into non competes that would be rendered, you know, unenforceable by this rule. So, I mean, the, the assumption being, if it's already unenforceable, then it, what, you know, because.

the time has lapsed, right, in the period of the restriction no longer, uh, is here, it's passed, then this isn't making it enforceable. It's already unenforceable.

Mike Vannoy: So for the small business owner, 15 employees with low turnover, maybe you had these in place that probably not a big task. You're a bigger firm. You've got a large sales organization where non compete was always a standard part of a sales or your, your, your, your, uh, uh, onboarding process. And you got, I mean, pretty common in the sales organization, maybe a 30 percent turnover, 15 percent voluntary, 15 percent involuntary.

Um, and it says you can't compete or steal our customers for three years. I mean, you could be looking at a lot of people that you've had to go notify.

Brian: Yes. And so, luckily though, the notice requirement here is a little more flexible than the notice requirements in many other statutes. Uh, so it's, it's, It doesn't have to be, mailed. So it could be delivered by hand. It could be mailed. It could be emailed. There's actually an option that the FTC explicitly says that you could text the notice.

That said, we would not recommend texting the notice. And that's something that can easily be overlooked. but you know, the, the FTC has, uh, you know, model language, uh, out there for this notice. Um, and look, what a company could really do, you don't need to send it individually. You could blast it out to, you know, all these workers.

It's okay if you're overbroad and, you know, send to someone who's not subject to a non compete that you're no longer subject to, right? That's, that, that's not an issue. you could send a broad notice. That's probably not ideal. Uh, but I think the key would be is if there are any senior executives. that are subject to non competes, you will not send them that notice because they, if they've entered into a non compete, they can still be bound by that after the effective date.

We just can't enter into a new one. So you don't want to notify, you know, the senior executives or else, you know, you're, you're taking away the non compete when you didn't have to.

Mike Vannoy: any guidance you have for employers that is not legalistic? It's more the Uh, the, the, the softer side of HR, if you will, uh, the more, the, yeah, you probably get kind of what I say, the more human side, but I mean, there's black and white of the law, but then there's just how you, how you treat people and build a culture of, uh, both accountability and performance, but also relationship and trust, right?

Brian: Yeah. So I think the first thing companies should really start this process by identifying the business reason, the justification for these agreements, right? Many times companies just do this because they started and, you know, doing it and they just go along with that practice. But, you know, think about whether the, you know, the restrictions you have in place or want in place are reasonably tailored to those justifications for it, right?

So, and then look at the hierarchy of agreements, right? Will a non disclosure be sufficient? If not, will a non solicit, you know, then help? Um, obviously non competes are, are going to be off the table. So, you know, thinking about, you know, What we can do to meet our goals. And that's why, you know, look, oftentimes when I speak with clients and we go through why they want to non compete and what they need to protect, we wind up reaching a point where we don't actually need a non compete because maybe all they needed was a solid non disclosure and a, you know, a non solicit of, you know, clients or something like that.

So, you know, consider alternatives. Um, you know, and I think, look, I think there will be a trend towards almost the reverse of how we've looked at, at the issue of, uh, restrictive, restrictive covenants. That instead of having this thing at the end of employment restricting them, uh, I would expect more employers to focus on, um, You know, making, you know, uh, compensation contingent on the continued employment, right?

Retention bonuses, uh, you know, and other incentives, uh, for employees, workers to stay at companies. So, you know, I think, you know, don't employers don't despair, right? Non competes will be generally off the table, but you do have other options. You just need to take some time to consider what those are. Uh, and that's why, you know, that work should start now, because, you know, this isn't something, uh, you want to be scrambling to, you know, uh, get together, you know, at the last minute, you know, use the time you have now.

If the effective date gets pushed out, then just put it on pause and at least you've done your analysis and you've figured out potentially, you know, how you will comply when, when the time comes.

Mike Vannoy: You know what? I think maybe my guidance for folks would be, uh, there's a sea change that has just been going on for a few decades now, and it's just accelerating. There's just, there's a shift in power from employer to employee. And I'll say it's largely based on supply and demand. Um, you know, we're, we're on what, three, seven, three, uh, unemployment, uh, under, under 4 percent for a couple of years.

It's been decades since we've had that. And, and it's based on birth rates from 30, 40, 50 years ago and the supply of the workforce. There, there are. Uh, employees have choices like they've never had before, and, they vote with their feet. And so, employers are going to have to be more accommodating to employees, less restrictive of employees, just surely to compete for the talent pool.

Uh, and employees, you know, they, they, they put people in office to vote for laws that they like and protect them. And I mean, We thought we were a kinder, gentler nation. I know it wasn't that president who said that, who implemented this, but, uh, you know, when, when Cobra first got enacted, we just did a podcast recently, recently on Cobra, it's like, you know what, you can still choose your insurance, but you can't get kicked off insurance when you lose your job.

It might still cost, it might cost you 1, 500 a month. It's not like it's free or anything, but we thought that was like a big, wow, some new benefit. I mean, From fair chance laws to leave laws to now today's conversation non competes. Just, I think everybody needs to understand this is part of a continuum that is not changing.

The laws are going to continue to take power from employers and give it to employees, and provide them more protections. So as an employer, small or large, whether you love it or hate it, get on board. and build an employment strategy and employment brand that embraces it.

Brian: Couldn't have said it better myself, Mike.

Mike Vannoy: Brian, anything you want to say in closing?

Brian: Uh, I, I think you just put it in a great way that, you know, look, this is what it's going to be. You gotta, you know, develop a strategy now and, and, and don't wait. You know, it's, it's coming. There are ways to still protect your business's information and other things. It's just going to take a little more nuance and a little more thought than just throwing out, you know, a broad non compete.

You know, we're going to have to think through things and take advantage of, you know, what restrictive covenants are left and other types of agreements.

Mike Vannoy: Yeah. Yeah. Very good. Always enjoyed talking to you, Brian.

Brian: Thanks for having me.

Mike Vannoy: And thanks to everybody else for joining today. If you learned anything today, if you've gotten value from today, I encourage you to like, comment and share this episode and please subscribe. Whether it's on YouTube or the platform of choice, wherever you consume your podcasts until next week, we'll see you then.