Employee Noncompetes
Contrary to popular opinion, noncompetes are alive and well. They can and are enforced under many circumstances. The key to a good noncompete is an experienced lawyer writing and/or reviewing your contract. Here are some practical tips to make these documents work for you in your business:
1. Don't use an off-the-shelf software package or your last job's agreement - so many agreements are faulty, and many don't meet specific state requirements. If you have a draft, use your attorney to review that draft, to make sure it is a good one, and enforceable in your state.
2. Definitions:
Confidentiality Agreements - where the employee promises to keep trade secrets and client lists confidential - VERY enforceable, so long as it is clear to your employees what is confidential in your company. This means locking up client lists, putting password protection on your key confidential computer data, and generally marking confidential material with a big "Confidential" stamp. Employees should not be allowed access to these materials without knowing that they are confidential, and they should never go home with employees. Non-solicits- where the employee agrees to refrain from taking clients of your business, or other employees - this is very commonly enforced, if drafted correctly. A non-solicit can cover employees, contracts, bids on contracts you have bid on, your clients, and your client's clients. It is basically a tool to say "hands off my employees" or "hands off the clients I showed you".
Noncompetes - can work, if carefully written and presented; this is an agreement in which the employee agrees to refrain from competing against the business of your firm, including starting their own firm, or taking your business to another firm. Again, careful drafting is essential. These work best, and are enforced the most, in situations where the employee was trained "from the ground up" so to speak, so that the employee received substantial consideration (see below for definition) for their agreement not to compete. It also works extremely well when a Seller agrees to it as part of a business sale.
3. All of these agreements need to have "consideration". This means that there must be a fair exchange between the employer and employee as part of the agreement. This does NOT mean that you can tell them they are fired if they don't sign, or give them one dollar. It is best to have these agreements signed upon hiring, at the time of a promotion, raise, or bonus of some significance. This provides enough of an exchange to support giving up the right to work certain places, or for certain employers.
4. Be VERY specific. It is most likely in court that any ambiguity will hurt your case, since you wrote the agreement. If you want an employee to refrain from bidding on contracts you bid on, then say that. If you want an employee to destroy all copies of client lists they may have at home, then clearly stated that. These agreements can sometimes get incomprehensible with legal language, but make sure the main points are made clearly and unambiguously.
5. Most noncompetes need to be in a very specific geographic boundaries and terms. You need to actually market and do business in the areas you wish to protect. You cannot protect the entire U.S.A., or world, simply because you have a lot of clients, or a few world-wide clients; you can really only protect what you are actually doing at the time the agreement needs to be enforced. For example, if you had plans to go into the West Coast markets, but never did, and it was in your agreement; it would probably be unenforceable as to an employee competing in those markets. Also, you will generally get only a few years for your agreements to be effective 2-3 years is normal; 5 years is probably too much. Make sure you have a "saving clause" that states that if a court finds your restrictions too restrictive, that they can re-write it, so it is acceptable; this gives the court an option other than to just dismiss your case.
Happy noncompetes!
Sarah Calvert is a Virginia attorney, who works exclusively with small businesses and entrepreneurs. The goal of her firm is to be a proactive partner in making businesses work effectively, economically, and with the least amount of legal hassle.
