NON-COMPETES: The Employer Perspective

Posted on July 12, 2013 in Consulting, Employment Litigation

Nothing infuriates employers more than an employee taking a book of business to a competitor.  The antagonism escalates after digging through the departing employee’s personal file only to learn he or she never executed a non-compete.  Fortunately, employers can rectify this common oversight and ask an employee to sign a non-compete even after the employee has started in the job.  The employer must, however, tender confidential information to the employee after the non-compete is executed.  But before executing a non-compete with an employee, an employer should consider these tips:

1.      Be selective

Employers too often prepare a form of non-compete and compel too much of their workforce to sign the agreement.  Not every worker should be subject to a non-compete. It should be used exclusively with employees who would do harm by working for a competitor.  Key factors to consider are the employee’s familiarity with confidential or proprietary information and unique access to the company’s business strategies.  Anyone with access to the Company’s secret formula or confidential pricing information should be subject, at a minimum, to a confidentiality agreement and maybe also to a non-compete.

2.      Consider whether a non-compete or a non-solicit (or both) is most appropriate

We often use the term “non-compete” interchangeably with “non-solicit” but we really mean different things.  A non-compete is a restriction on a person’s ability to compete in a defined scope of services in a reasonable geographic territory and for a reasonable period of time.  A non-solicit is a restraint (for a reasonable period of time) on a former employee’s ability to “solicit” customers of the company to cease their relationship with the employer.  Sometimes a non-compete and non-solicit can be morphed.  Often the result is a restraint on an employee’s ability “not to solicit or provide services to” a customer of the business for some reasonable period of time.

Typically, employers are better protected when using a non-solicit for persons in sales positions. A well-tailored non-solicit may prevent an employee from leaving and taking the book of customers he developed while working for the company.  In contrast, a non-compete is better for management level employees who know more about the overall strategy of the business and may have (depending on the circumstances) less contact with customers.  Some situations require both a non-solicit and a non-compete.  The point is that an employer should consider the specific duties associated with the job and draft the restrictive covenant to best fit the circumstances.

3.      Make an example

Many companies require that employees sign non-competes but do very little to enforce the agreement.  Word spreads quickly and not for the good of the employer.  It promotes the belief, right or wrong, that the non-compete is either unenforceable or not significant to the company.  When an employer spends the effort and the money to enforce a non-compete, the impact will be felt throughout the workforce.  Employers need that image of being tough on their non-competes.

4.      Be consistent

Sticking with a consistent philosophy and approach with non-competes promotes an image of fairness.   This works in two ways. First, if an employer lets some employees violate their post-employment obligations, than other employees believe it is fair to ignore the contract.  Second, most employees will see it as fair if all workers in the same job position are required to sign the same non-compete.

5.      Don’t overreach

Employers should draft a non-compete (or non-solicit) to be as reasonable as possible because it greatly enhances the likelihood that a court will enforce the obligation.  Drafting a non-compete that is obviously void does little good.  Employers already must battle a common misconception that non-competes are unenforceable.  Yet, we see poorly drafted non-competes all the time.

Moreover, it is wrong for employers to expect courts to reform a non-compete to be reasonable even if the law allows that remedy.  A court might just as easily decide the employer made no effort to comply with the law and strike the non-compete in its entirety.

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