Zinzow Law

FTC Non-Compete Ban: What It Is, What It Isn’t, and Strategies to Blunt its Impact

FTC Non-Compete Ban: What It Is, What It Isn't, and Strategies to Blunt its Impact

I. Introduction


On May 7, 2024, the U.S. Federal Trade Commission (“FTC”) published its final rule declaring all existing non-compete agreements unfair competition and making them unenforceable, with very limited express exceptions. The rule becomes effective on September 4, 2024. The team at Zinzow Law joins the chorus of voices decrying this as yet another substantial overreach by what should be the limited government our Founding Fathers designed for us. If you believe in Liberty and in exercising freedom in the pursuit of your American Dream, then this article is a must read. While the FTC’s rule is being challenged in litigation throughout this country, this article summarizes immediate action you can take to achieve your objectives in defiance of the government’s latest edict.

II. What the Rule Does & What it is Really After



The rule and its purported justification, full of statistics and summarized testimony of the “experts,” runs a full 570 pages. Woven into the fabric of all those pages is what the FTC is really after: forced wage increases and guaranteed employment contracts which prohibit termination at will, and which make it difficult and expensive to terminate even for cause. Responding to those who opposed the rule’s adoption, the FTC exclaimed that employers have better tools at their disposal than non-competes; employers can simply: (1) provide a better work environment, (2) pay higher compensation to prevent employees from leaving, and (3) provide guaranteed contracts with guaranteed employment duration. The FTC calculates that as a result of this new rule, the FTC will force employers to do one or all of these three things, thereby increasing employee wages nationally by $58,291,058,349. (Rule, App. Table A.1). For those not minding all those commas, that is over $58 billion!

With the FTC’s true purpose in mind, the rule makes sense. It prohibits employers from entering into, or attempting to enter into, non-compete clauses with workers who are not senior executives, whether classified as employees or independent contractors, and whether the worker was employed through a PEO or directly by the employer. It also declares existing non-compete clauses with these workers illegal and unenforceable unless the worker has violated the clause before the rule’s effective date. It also requires employers to send written notice to both current and former employees notifying them of the rule, and stating that the clause is now unlawful, and that the employer will not enforce it. This notice must be sent by the effective date. You can thank the FTC for making it easy for you to do this, because the FTC has created model language (though you are not required to use it) which also tells the worker that “you may seek or accept a job with any company or any person-even if they compete with employer” and “you may complete with employer following your employment with employer.” The FTC has also done us all the favor of translating this model language into Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean.

So-called senior executives are given different treatment under the rule, but do not breathe a sigh of relief just yet. The definition of senior executive is, well, not representative of what most employers consider a senior executive to be. Additionally, even when dealing with a senior executive, the rule differs from how other workers are treated in only two ways: (1) existing non-competes remain enforceable into the future, though employers are still prohibited from entering into new non-compete clauses with senior executives after the effective date; and (2) employers are not required to send the love letter welcoming competition. For a worker to qualify as a senior executive, the worker must: (1) be the employer’s president, CEO, or equivalent, (2) have policy making authority without having to consult anyone else, and (3) receive total annual compensation of at least $151,164 excluding fringe benefits. If the employer is one of a conglomerate of companies as is the case with many in this industry, the worker must have decision-making authority over the entire conglomerate, or they are not considered a senior executive.

III. How You Can Navigate Around the Rule’s Overreach


For those keen and decisive enough to implement certain strategies, the rule’s apparent impact can often be avoided or substantially minimized. While at first blush an employer’s preference for a non-compete is to prevent a worker from competing, this is typically not the problem employers are actually trying to prevent. As deeply patriotic Americans, those of us who build America believe in the free market. We believe that competition makes us better and betters the world around us. What we are truly trying to prevent, is investing time and coin into building a brand, building client relationships, and building a skilled worker with proprietary information, only to have that worker harm the brand, steal the clients, and use the proprietary information elsewhere. These concerns are legitimate, and employers can still prevent workers from engaging in these improprieties if employers deploy the right strategies.

While this primer cannot cover all of these strategies, or even cover select strategies in depth each merit, we will highlight some to begin the dialogue we urge you to have with the right legal professional. First, the rule does not prohibit employers, now or in the future, from making workers sign a non-compete clause which prohibits competition while the worker is employed by the employer. (Rule, p. 66-67). In other words, you can prohibit concurrent employment. This type of narrowly drawn clause allows you to target the most common fact pattern: a worker who has started creating a competing business while employed by you, or a worker who has started sharing information with a competitor during a courtship period while that worker is still employed by you. Second, employers can draft highly specific confidentiality or non-disclosure clauses which prevent the worker from sharing proprietary information, but these clauses cannot be so overbroad that they are the effective equivalent of a non-compete. (Rule, p. 68). These clauses must be carefully designed and written to survive scrutiny. Third, employers may be able to craft a special clause which imposes a cooling off period which does not prohibit, penalize, or function to prevent a worker from switching jobs or starting a new business altogether. (Rule, p. 49). Fourth, employers may impose a training-repayment agreement, also known as a TRAP, which requires the worker to reimburse the employer for training costs if the worker leaves the company before a certain date. The sum must bear a reasonable relationship to the costs the employer incurred (Rule, p. 68). Many employers can compute and document a substantial cost of training; substantial enough that a worker would likely be dissuaded from leaving. Fifth, employers may implement strategic and precisely targeted clauses which prohibit workers from soliciting employers’ other workers, and perhaps even employer’s clients as long as the provisions are not overbroad. (Rule, p. 77). Sixth, employers can impose a clause which requires a worker to repay bonuses received if the worker leaves employment before a certain date. (Rule, p. 82).

Each of these, and other strategies, require immediate action to implement. Garden variety employment contracts, handbook provisions, and non-compete agreements were likely not drafted with these strategies in mind. New agreements of some kind may need to be drawn in some instances. Additionally, if employers choose to send an unenforceability notice out of fear of non-compliance, such notices should be very carefully worded to preserve the above and other strategies rather than entirely waive protections which do not fall under the rule’s definition of a non-compete.

IV. Why Must You Take Urgent Action


Employers should seriously evaluate the risk of a wait and see approach. While several industry groups are challenging the new rule, it could take many months to several years before the issue is ultimately settled for Florida employers. Additionally, anticipating these legal challenges would be forthcoming and that portions of the new rule could be attacked, the federal government included a severability provision in the rule, meaning that even if courts find certain portions of the rule invalid, other portions of the rule will be allowed to survive because the rule was not drafted as an all or nothing edict.

Additionally, employers who do not deploy proactive solutions could be hit with lawsuits, possibly even class action lawsuits, for failure to comply. While there is presently no right, under federal law, of a worker to sue his or her employer for violation of the rule, such a right likely exists under Florida’s Deceptive and Unfair Trade Practice Act which provides a lawsuit remedy for workers who are the subject of unfair competition. The Florida Act defers heavily to interpretations of the FTC, which has now declared these restrictions to be unfair competition. Law firms often take consumer protection cases on a contingency fee basis because of the right to recover attorney’s fees, so workers may not need any money to hire lawyers to sue their employers. Importantly, if employers are sued by one or more workers, the employer may not have insurance coverage available to pay for the defense and any damages which may result (certain employer practices liability policies may provide some coverage, but these policies were never written with this issue in mind).

Lastly, even if the rule in its entirety is declared unlawful and an employer has not been sued by workers in the interim, the FTC still has the constitutional authority to take legal action against employers under existing lawful provisions of the FTC Act. The FTC Act has been in existence for many years. Before the new rule became effective, the FTC was consistently using the Act itself to pursue employers for using what the FTC believed were overly restrictive non-compete agreements.

For these and other reasons, employers should take proactive measures now to avoid federal enforcement and worker litigation. The good news is that creative strategies are available to circumvent the rule and minimize its immediate and ongoing impact on employers who must protect their legitimate business interests.
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2024 New Laws To Live By

New laws to live by - Florida

In his inaugural address, Thomas Jefferson said that “[a] wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”

I am pleased to report that from the beginning of my work last year in the trenches on government affairs committees and with lobbyists for this legislative season, through my time in Tallahassee and post session wrap up, Florida state government has stayed true to Jefferson’s enlightened words. Our state government has largely stayed out of private industry’s way and prevented local government, perhaps not so enlightened, from taking our bread. Having spent the last twelve months working in preparation for this year’s two-month session now concluded, I can honestly say that it never gets old. As a Patriot I find joy in being a voice to our representative government – a government that listens. As an Advocate I feel privileged to represent the will of the very people who build America. I hope this legislative briefing will enlighten you as I remain humbly at your service.
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Your Resource for Changing Laws: Construction & Development

Your Resource for Changing Laws: Construction & Development

Our state capitol in Tallahassee may seem like a world away, but as they say, all politics is local. Change in Tallahassee brings change to your doorstep. Just finishing its second week of legislative session, things are moving swiftly and more flexibly as Governor DeSantis campaigns to be our country’s next President. While there are still almost two months of session left to go, Zinzow Law’s work for you began months ago, influencing priorities to support, priorities to oppose, and bill drafting. As I close out this week’s advocacy from the halls of Tallahassee, I write to provide you with this progress update, which will be one of many to follow during session, ultimately culminating in our official guide: New Laws to Live By. New Laws to Live By will explain, as it has in prior years, laws and regulations passed and how they impact you. Do not hesitate to contact us if we can be a resource for you locally, in Tallahassee, or beyond.
Immigration: Despite the challenges caused by last year’s sweeping immigration bill, which became effective January 1, few elected representatives, including the Governor, seem willing to talk about fixing unintended and problematic consequences. This is little surprise, given the ongoing Presidential campaigns. Even still, the immigration law is not the death knell it seems, and a studied understanding leaves businesses free to grow their organizations without fear of substantial repercussion.

Construction Defect: Last year our industry landed two big wins in the fight against frivolous construction defect claims. We are guarding against anything that will water down those wins—and such efforts are afoot–so that we can be well poised to build upon them in future sessions.

Sadowski Funding: For many years money from the Sadowski housing trust fund was wrongly used to fund a multitude of other state programs. Full funding of the fund creates billions in economic benefit and creates nearly 30,000 jobs while providing safe and affordable housing. We are advocating for full funding and for legislation prohibiting the misapplication of those funds to non-housing uses. Mobility Fees and Impact Fees (Dual Payments and Transfer of Credits): The industry has always understood mobility fees as a replacement for, and successor to, impact fees. Yet the government, all too happy to pull deeper from your pockets, has been treating these fees as two different and available hammers, and have been double dipping by charging both. Additionally, in areas where builder/developers have acquired impact fee credits, municipalities will not apply these credits against mobility fees, all of which increases the cost of your development and housing. We are advocating for the passage of legislation that will put an end to this form of fee gouging.

Workforce: Worker’s compensation insurance and other forces at play have made it difficult for companies to recruit working teens, ages 16 and 17, into an exciting and rewarding career in construction and development. We are advocating for changes which will allow young adults, after sufficient OSHA safety training, to work on project sites, and for enhancing available construction trade education offerings to students.

Heat Exposure: Counties across the state have been trying to impose their-own jobsite heat exposure regulations upon construction and development companies. Workers are already well protected and trained on heat exposure under OSHA regulations and programs. We do not need 67 different counties adopting a multitude of conflicting additional and unnecessary burdens, so we are advocating for the passage of a law which prohibits counties and cities from taking this action.

Residential Building Permits: Review continues to take too long notwithstanding ever-increasing taxes and fees charged by government, and builder developers often receive comments from reviewers on a piecemeal basis which complicates, delays, and increases expenses in the permitting process. We have been advocating for a bill which imposes review deadlines and prohibits piecemeal comments, as well as which requires reviewers to cite specific code provisions supporting their comments and rejections, so you are not left guessing and have the ability to defeat requirements invented out of thin air.

Construction Fraud: Because of a few bad actors who stole deposits from unsuspecting homeowners in hurricane impacted areas, some are pushing for a massive change to the way residential builders handle finance. Presently making its way through the legislature is a bill which attempts to impose escrow account and accounting requirements on builders, making failure to do so a felony, even if the construction project is successfully completed. We have been working closely with industry partners on defeating this bill, or substantially narrowing its scope. There are already sufficient laws and regulations on the books which prohibit this form of theft.

Warranty Transferability: Contractors and warranty companies have honored the transferability of a one year or 2-10 warranty, but some builders have recently started denying warranty claims by successive owners, even if the warranty is unexpired. As a result, legislation is now pending which will require that builders and warranty companies honor transferred warranties. Early versions of this legislation make it a deceptive and unfair trade practice to deny a transferred warranty, which will open the floodgates of litigation. This week we met with both the House and Senate sponsor to discuss our concerns about certain aspects of the bills and secured an agreement to remove any offending language.

Continuing Contract: Continuing contracts with cities and counties work much like private sector Master Service Agreements in the way that they allow construction companies and design professionals to bid for the opportunity to receive an ongoing contract for multiple projects, rather than for just a single project. We are supporting legislation which expands these opportunities from their current $4 million in value to $10 million, and which opens the door to other project types.

Private Provider: In those areas where permit review and building inspection are slow or otherwise problematic, private providers can be an extraordinarily valuable tool. Current law allows a developer or contractor to engage a private provider to perform the functions of the government building department. Current law also requires counties and cities to reduce their fees when this occurs. We support two bills which aim to clarify existing law, and which penalize local government for refusing to appropriately reduce their fees when a private provider is used.

Buy American: You will find no fiercer and ally in the defense of God and County than the building industry, but continued insistence that contractors use only American made products on government projects hurts America. The products are often not commercially available, or their lead time is so extensive that the project cannot be delivered on time. For the last three years bills have been worked through the legislature to create such requirements, but these bills purporting to support American industry are a ruse. The manufacturing industry has not yet returned strongly enough, and these bills therefore impose unnecessary government red tape whereby contractors must submit mountains of paperwork to convince government of what the people already know. We oppose, as we have for the last two years, this badly timed legislation.

Sunshine 811: Call before you dig! Florida’s utility locate service has been an important tool in the prevention of property damage and jobsite injury, but bills currently underway would weaken and slow the industry. These bills propose to lengthen location and response times. We are opposing these efforts.
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Justin R. Zinzow speaks to NUCA Florida about Claims Preservation.

Justin R. Zinzow speaks to NUCA Florida about Claims Preservation

Whether it is a right to compensation, change order, time extension, or otherwise, it cannot be relegated just to legal professionals or litigation proceedings. By the time construction professionals reach a lawyer, a substantial portion of claims preservation requirements have already been triggered. Construction professionals who overlook these requirements can lose their rights.

This seminar covers:

  • How to Review a Construction Contract;
  • Top 7 Contract Clauses to Look Out For;
  • Additional Claim Preservation Issue; and,
  • Contract Compliance Best Practices.
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