The Federal Trade Commission is proposing a new nationwide rule that would ban employers from imposing non-competition restrictions on agency employees (independent contractors as well as employees). The FTC considers non-compete agreements “unfair methods of competition”.
Of course, your associations (IIABA and PIA nationally) are fighting this rule imposition on the grounds that it would imperil agency asset value and continuity if any former employee could simply solicit the agency’s clients at will after departing employment.
While the FTC is trying to eliminate restrictions on former employees ability to earn a living in their area of expertise in the locale that the employee lives, the ruling is so broad that it will have seriously harmful effects on an insurance agent’s ability to protect his client base, it will cause EVERY CONTRACT to be reviewed and altered, and, subsequently, could seriously hamper the value of many insurance agencies whether Going Concerns or that are being valued for succession and perpetuation.
Purpose of the Rule
The FTC is attempting to protect workers ability to change jobs. It believes that Non-Compete Agreements that prohibit an employee from being employed by competitors to the former employer and/or within a certain geographic area and time period are unfair to the employees.
The Silver Lining
For decades we have been decrying geographic and time-sensitive non-compete agreements as being overly broad and restrictive and the courts have routinely sided with the employee against the agency unless clear wrong-doing can be proven outside of the effort of the employee to continue to earn a living as an insurance agent. So, we have been promoting the conversion of Non-Compete Agreements into one or more of several restrictive covenants that still permit the former employee to work in his/her field of expertise in the area in which they live.
For instance, the rule will specifically not prohibit NSA’s (Non-Solicitation Agreements) or NDA’s (Non-Disclosure Agreements) or NPA’s (Non-Piracy Agreements) and NAA’s (Non-Acceptance Agreements) if they are limited to protective purposes and don’t stop a former employee from working where he or she lives in his/her profession. Its basic purpose is to allow agency workers to be employed by any company they choose regardless of location and competitiveness with their current or former employer.
In other words, “YOU CAN’T STOP YOUR EMPLOYEE FROM WORKING WHEREVER THEY WANT” after they leave your employ. This, in itself, evens the playing field BUT ONLY IF an agency could still protect their data and trade secrets from being stolen by former employees who are hired by your competitors to poach clients from the agency using knowledge about agency customers and products that was accumulated by the former employee while employed by the former employer.
And, if your Agreements impose restrictions on your workers that mimic non-compete clauses under different names the FTC has included wording to prohibit “functional equivalents” to non-compete clauses. So how you title the Agreement doesn’t matter. IF IT LOOKS LIKE A NON-COMPETE AND SMELLS LIKE A NON-COMPETE it will be treated like one and will be prohibited.
The Effect on Agency Values
If you have NO restrictive agreements with your employees this rule will not affect you. However, as a primary appraiser of insurance agencies, we can tell you that the lack of restrictive covenants will certainly affect the agency value. Who would be willing to pay you top dollar for your agency business if you have qualified employees who could leave upon the change of ownership and compete with their former agency on all of ITS customers. Will they take them all?? Probably Not. But they could certainly hurt an agency and will certainly cause consternation to the agency who is trying to transition ownership with all of its target customers being solicited by the former employees of the agency. And the value of insurance agency businesses will, once again, become retention based since historical trends and assumptions would no longer valid.
The Reality
Agency owners who have tried to impose geographic and/or time-based non-compete clauses already know it is virtually impossible to enforce these clauses. Courts throughout the U.S. have considered “Reasonability” in their decisions and have denied non-compete challenges unless blatant wrong-doing has occurred. But the same courts have sustained challenges using NSA’s (Non-Solicitation Agreements) or NDA’s (Non-Disclosure Agreements) or NPA’s (Non-Piracy Agreements) and NAA’s (Non-Acceptance Agreements) to legitimately protect the assets of an insurance agency from departed employees who have tried to virtually steal customers, other employees and the agencies confidential information to which they had access prior to their departure.
NON-SOLICITATION AGREEMENTS do not permit former employees to solicit the clients of their former employers using knowledge and data that they could only have secured from agency data while employed and compensated by their former employer. For instance, anyone can find out who owns a business, but the information gleaned about the number, type, compensation and functions of client and their employees is confidential to their insurance agent (and his staff). Departed employees cannot use that information if they have a Confidentiality and Non-Solicitation Agreement.
The Non-Solicitation agreement’s term is related to how long the confidential data remains “relevant”. Data becomes “stale” after one or two years (renewal terms). The courts permit the duration of the Non-Solicitation to include a reasonable period of time for the agency to replace any relationship in existence between the former employee and the agency clients (usually one to three policy terms)
NON-DISCLOSURE AGREEMENTS forbids the disclosure by a former employee of confidential information and the agency’s intellectual property known to the former employee while employed by the former employer and not commonly attainable in the public eye. This covers things like policies and forms used for specific clients, rating information, and client information (not easily available publicly).
While Non-Solicitation Agreements normally pertain to clients with whom the former employee was working in production or service roles in the former employer’s agency, NON-PIRACY AGREEMENTS refers to all other clients (and employees) of the former employer (and, sometimes, refers to clients who were active for the former employer within a year prior to the employee’s departure and to prospects that were actively being solicited by the former employer during the former employee’s tenure with the agency.
NON-ACCEPTANCE AGREEMENTS are implemented in recognition that the agency’s clients are free to use ANY insurance company and agency that they choose. However, if the transaction involved the sale and purchase of agency clients, then this agreement provides that the seller not only can’t solicit the accounts that (s)he sold to the buyer, but for a period of time (usually 3-5 years), the seller can’t accept the clients that he has sold as new clients regardless of whether they were solicited or returned to the seller of their own volition. The clients can go wherever they wish EXCEPT back to the seller if the seller has taken payment in exchange for transferring the clients to the buyer.
The FTC’s rule references de facto non-compete clauses and “functional violations” that muddy the waters sufficiently that any violation of any restrictive covenants may be subject to litigation. It would also force employers to rescind any existing non-competes currently in use and could require employers to inform former employees that previously executed non-competes are no longer valid.
If passed, every agency-employee agreement will be required to be changed to adhere to the new rule.
What Can You Do About It?
Individual agents have little influence on the FTC. However, knowing how long Non-Compete Agreements have been under attack and the fact that the courts are commonly supporting the individuals against the employers in such cases that simply restrict the ability of an individual to earn a living, we recommend that you preemptively revise any agreements to restrict your employees from damaging your agency should they depart from your agency and stay in the insurance business.
This is COMMON SENSE and the exercise of the Golden Rule. “Do Unto Others” implies that both parties come out of any relationship unharmed. That means we don’t interfere with an employees ability to earn a living – BUT – we should fully expect that the employee not participate in any way in activities that will harm our ability to do the same.
The only other thing we can see happening as the result of this ruling is that agency compensation may jump since the way to keep valuable employees is to pay them what they could earn by taking a job with our competitors. Unfortunately, Compensation Compression is a reality in our business as in others when market pressures force compensation to increase for new employees while existing employees are paid according to their productivity in their existing role. If that productivity increase does not match the competitive pressure of the marketplace seeing new employees, your people could find higher pay by jumping to a new job than by staying where they are. Happily, the offset is appreciation and respect. The more appreciated an employee feels, the less likely it is that they would be tempted to jump to a new job for more money.