Employer protections in wake of FTC Ban

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 “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 of 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 non-competes, 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. 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). NY 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

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 in all forms are dead (except for senior executives), independent contractors must be treated as such in practice, meaning allowed to work independently and not under an employer's thumb, that non-disclosure 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 over broad.

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.?

[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).

?Copyright Stephen Reich 2024.