In The Wake Of The Ftc’s Ban On Non-Compete Agreements

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You may have heard, but in case you didn’t, the FTC just outright banned virtually all
non-compete agreements in the United States. But fear not employers, all is not lost.
There are still other ways to protect your business and proprietary information from
departing workers or contractors. However, before turning to them, there are numerous
pitfalls in any contract for employment to be aware of.


INDEPENDENT CONTRACTOR VERSUS EMPLOYEE


Forget about a former worker leaving for a competitor, the last thing any business
owner wants is to run afoul of the IRS, but that’s exactly what happens when you
misclassify an employee as an independent contractor. And simply having the individual
sign an independent contractor agreement alone, while helpful, does not suffice. See
Quality Health Care Mgt. Inc. v. Kobakhidze, 42 Misc. 3d 537, 542, 977 N.Y.S.2d 568, 573
(N.Y. Sup. 2013) (citing Araneo v. Town Bd. for Town of Clarkstown, 55 A.D.3d 516, 865
N.Y.S.2d 281 (2d Dept. 2008)).


New York courts handle the issue on a case-by-case basis, weighing various factors
including whether there was a written independent contractor agreement (supra), the
practices of the parties, the status of the individual, whether the employer may
terminate the relationship at any time without cause and whether compensation is
based on commission. “However, the primary factor to consider is “the degree of control
exercised by the purported employer over the results produced or the means used to
achieve the results.”” Id. (quoting Wecker v. Crossland Group, Inc., 92 A.D.3d 870, 871,
939 N.Y.S.2d 481 (2d Dept. 2012)) (citing Araneo, 55 A.D.3d at 518–19, 865 N.Y.S.2d 281).


In Quality, the Court found the defendants were not employees of plaintiff medical
testing facility because plaintiff did not pay social security tax, produce 1099s or W2s,
provide benefits, health or unemployment insurance, a desk, stationary, a telephone
number or require defendants to report to work regularly. Quality Health Care Mgt. Inc.,
42 Misc. 3d at 543. Contrast with Matter of Vega, 35 N.Y.3d 131, 138, 149 N.E.3d 401
(2020) where the Court denied plaintiff courier’s bid for unemployment insurance
because it found that delivery company defendant Postmates treated its couriers as
employees since it “exercises more than “incidental control” over them, to wit, bearing
the total cost when customers failed to pay, unilaterally setting the fees, handling all
customer complaints and dictating when and where couriers could deliver food, despite
couriers being able to control their schedules. Id at 406. [1]


Therefore, in an addition to properly drafting the agreement, an employer should in
practice exercise little supervision and control over the independent contractor, or risk
having him/her converted to an employee under the law.


NON-SOLICITATION AGREEMENTS


Non-solicitation agreements are designed to prevent client theft and workforce
pilfering, but they are only enforceable in New York “so long as they are necessary to
prevent disclosure of trade secrets or confidential information or where an employee’s
services are unique or extraordinary.” USI Ins. Servs. LLC v. Miner, 801 F. Supp. 2d 175,
190–91 (S.D.N.Y. 2011). The prohibition does not extend to soliciting clients whose
information was obtained through readily discoverable, public means like the phone
book. Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 308, 353 N.E.2d 590, 593–94
(1976). And the individual must have engaged in some wrongdoing like pirating a client
list to breach the clause. Id. Thus it is vital that employers keep their client lists under
lock and key and draft language in the agreement acknowledging the value and secrecy
of any such list.


Furthermore, non-solicitation agreements only prohibit the employee from initiating
contact with a client to compete for business (or help a new employer do the same
behind the scenes). They do not necessarily preclude a client that seeks him/her out
where any such restriction is unreasonable in duration and scope (24 months found
reasonable in Miner, 10 years with no geographic limitations found unreasonable in
Power Boot Inc., v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489, 507-508
(S.D.N.Y. 2011)). Nor do they apply to clients the individual brought to the employer
solely on his/her own. See BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 392, 712 N.E.2d
1220, 1225 (1999).


As for soliciting former colleagues, the reasonableness in scope and duration test
remains the standard, but at least one court has called for greater scrutiny and
reiterated the overall requirement that such clauses serve to protect employer trade
secrets and apply solely to specialized workers, not stifle competition at large or serve as
a type of gag order on banal communications with former co-workers. In re Document
Techs. Litig., 275 F. Supp. 3d 454, 468 (S.D.N.Y. 2017).


In any event, while their enforceability is not guaranteed, non-solicitation agreements
remain beneficial to the employer for the deterrent factor alone since they, unlike noncompetes,
are not inherently illegal.


NON-DISCLOSURE AGREEMENTS

NDAs serve to protect the employer’s proprietary and confidential information from
being disclosed by an individual that has access to it while employed or engaged. They
can last forever– however, they are not all-encompassing. See
https://www.nysenate.gov/legislation/bills/2023/S4516 (statutory ban on “#Metoo”
violative NDAs). They also only apply to trade secrets or valuable customer lists (at least
in New York). Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 308, 353 N.E.2d 590,
593 (1976).


Trade secrets are defined as “any formula, pattern, device or compilation of information
which is used in one’s business, and which gives one an opportunity to obtain an
advantage over competitors who do not know or use it.” Intertek Testing Servs., N.A., Inc.
v. Pennisi, 443 F. Supp. 3d 303, 339 (E.D.N.Y. 2020). New York courts use six factors to
determine if the purported secret is protectable: “(1) the extent to which the information
is known outside of the business; (2) the extent to which it is known by employees and
others involved in the business; (3) the extent of measures taken by the business to
guard the secrecy of the information; (4) the value of the information to the business
and its competitors; (5) the amount of effort or money expended by the business in
developing the information; (6) the ease or difficulty with which the information could
be properly acquired or duplicated by others.” Faiveley Transp. Malmo AB v. Wabtec
Corp., 559 F.3d 110, 117 (2d Cir. 2009).


Thus, just calling it a secret is not enough. An employer should take concrete steps to
secure any confidential information it wants protected from disclosure in line with the
above factors– think password protections, cyber security measures, restricted access,
consistent and specific labeling (as opposed to affixing all documents with a confidential
legend) and other steps.


SUMMARY


The above restrictive covenants are not the only provisions an employer should worry
about. Work made for Hire Agreements, Indemnification Clauses, Notice Provisions—
they all hold additional value that any employer contracting with an agent/employee
should understand. And there are more. But those can be discussed another day.
For now, it is important to take away that non-competes are dead (except for senior
executives), independent contractors must be treated as such in practice, meaning they
are allowed to work independently and not under an employer’s thumb, that nondisclosure
agreements relating to workplace harassment are illegal and non-solicitation
agreements or NDAs relating to confidential information remain enforceable, but only if
aimed to protect employer trade secrets and are not overbroad.

[1] Some states like Massachusetts even carry a presumption that workers are
employees if they are engaged in the same kind of business as the employer. See
https://www.mass.gov/info-details/massachusetts-law-about-independent-contractors.
See also Gonzalez v. XPO Last Mile, Inc., 579 F. Supp. 3d 252, 260 (D. Mass. 2022).
The above is not legal advice, is meant for education purposes only and the author is not
responsible for any errors. In some jurisdictions it may be considered attorney advertising.
Copyright Stephen Reich 2024.