Noncompete agreements are on the rise; many companies are targeting candidates who may consider a change if the right opportunity comes along. Here are nine factors to think through before you decide what’s best for your business:
- Noncompete basics — Often part of a larger employment contract, noncompetes prohibit your employees from working for competitors and using your client list or otherwise working against you — typically for a year after they leave your company. They can be drafted to protect a specific sales territory, certain clients by name or intellectual property.
- The laws in your state — State, not federal, laws govern noncompete agreements. It’s wise to check with your attorney to see how noncompetes are usually handled in your state. Also, if you have employees in more than one state, you may need several versions.
- Exiting employees — Noncompete agreements let exiting employees know their boundaries when they go to work for another employer.
- Left-behind employees — Long-term, loyal employees want to know you’re being proactive in protecting them from client losses and competitive disadvantage.
- Your industry — Noncompete agreements are found in nearly every industry, and especially in those that rely on sales professionals for business development or competitive edge is based on confidential intellectual property.
- Fairness — It’s tough to write a fair noncompete agreement. Unreasonable demands might make it difficult to enforce one. Think this through — you may be asking for problems. Instead, try to place reasonable limitations dealing with time and geographical area — don’t restrain work any more than necessary to protect your business interest. Don’t try to prevent employees from making a living in the future.
- Enforceability — Historically, noncompete agreements have been disfavored by the courts in most states, but not always. A group of insurance brokers left B.G. Balmer & Co. for a competitor in 2003. In June 2013, a Pennsylvania state court judge ruled that they had violated their noncompete agreement and awarded the company $2.4 million in compensatory damages and $4.5 million in punitive damages. It took 10 years, but the existence of the noncompete paid off.
- Specificity — The more specific your noncompete terms are, the easier they are to understand and enforce. Fear of litigation alone may be enough to enforce the terms for some employees. You should create a plan for enforcing your noncompetes in case you suspect a violation.
- Your hiring process — Noncompetes should be part of your job descriptions or communicated to candidates as soon as there’s interest on both sides. Don’t create a bait-and-switch scenario or have the deal fall through at the end because of a surprise noncompete agreement. Know that by having a noncompete, you could lose a few good candidates who are unwilling to sign one.
Your employees won’t always remember that they signed a noncompete agreement when they were hired. They were excited and signed lots of paperwork. When they decide to look for a new job in a couple of years, they may have totally forgotten the agreement.
If you’re hiring and your ideal candidates say they didn’t sign a noncompete with their last employer, you have no way of knowing whether that’s correct unless you call the previous employer yourself.
You may think about paying a consideration — additional compensation in exchange for the employee’s agreeing to the noncompete. It may be a nonmonetary benefit, like changing job duties or responsibilities. Some states require the payment of a consideration, while others merely consider it an important factor for courts to study when determining whether to enforce the agreement.
Remember, courts are very reluctant to enforce a noncompete that is so broad that it inhibits the former employee’s gainful employment. Indeed, there’s been a lot of press around noncompete agreements recently, and businesses may want to consider the cost, in both money and loss of reputation, if they push noncompete agreements into new areas where they’ve never been used. Also, employees can make claims against you for not telling them upfront that signing the noncompete was a requirement — when they’ve already quit their present job. But the existence of a noncompete may make employees think twice before going into competition with you.