Henry Ford said “competition is the keen cutting edge of business.” That “cutting edge” is sharp enough to hurt when we lose one of our talented team members to a competitor.
And that is why businesses use non-compete agreements.
Our guide to non-compete agreements can help you figure out if they are helpful for your business or harmful!
How non-compete agreements work:
A non-compete agreement is an agreement that prevents an employee from working for a competing company for a specific period of time after leaving your employ.
Courts scrutinize non-compete agreements:
Courts tend to carefully scrutinize these agreements, because they limit an individual’s ability to earn a living. Courts check that the scope isn’t overly limiting in terms of geography or time.
- If you state that your salesperson may not work for a competitor anywhere in the Puget Sound for the next ten years, it probably won’t be enforceable.
- If you state that they can’t work for a competitor within 20 miles for six months, this is much more likely to be deemed reasonable by the courts.
If your employee does go to work for a competitor, your recourse will be to stop them with an injunction; therefore, it is important that your agreement bears up under a judge’s scrutiny.
The White House wants you to stop using non-compete agreements:
This month, the White House released a report and blog post attacking the use of non-compete agreements.
The White House claims that using non-compete agreements has a negative effect on the economy by “depressing wages, limiting mobility, and inhibiting innovation.”
Specific areas of concern raised by the report included that:
- Workers are not informed about the non-competes prior to accepting job offers, so they lack leverage and opportunity to bargain
- Workers are often unable to find other employment, even when they are laid off or terminated without cause
- Many non-competes are non-enforceable and broad in scope, but workers don’t know that
- Non-competes are given to workers who don’t know company trade secrets so shouldn’t be constrained from working in the industry
States are already addressing problems with non-compete agreements:
Many states have already started to address the issue of non-compete agreements. In California, Oklahoma, and North Dakota they are not enforceable in court.
Oregan places a lot of restrictions on using non-compete agreements:
- The employee must make more than the median income for a family of four
- The employee must be informed in writing of the non-compete requirement no less than two weeks prior to start of employment.
- While the worker is restricted from working, their former employer must pay them $36,650 per year, or one-half of their normal pay, whichever amount is greater.
Our other neighbor, Idaho, restricts non-competes to “key employees”.
The White House intends to work with the Department of Labor and the Treasury Department to start a discussion on the issues surrounding non-competes, with the purpose of identifying best practices in states, and to call for reforms.
This is a good time for all of us to review our own use of non-compete agreements.
You should review your use of non-compete agreements:
- It’s best to have the form signed by your employee at the time of hire.
- If you have failed to get the non-compete agreement signed at the time of hire, consent might be given later on in exchange for something.
In order for it to be a legitimate non-compete agreement, both sides must be getting something of value in return:
- If you require a worker to sign a non-compete agreement at the time they’re hired, the person is getting a job in return for their signature.
- If you want an employee who’s already working for you to sign a non-compete, you could offer them a promotion, additional benefits, or stock options.
Tips for avoiding trouble with your non-compete agreements:
- Always allow an employee the option of having their attorney review any agreement you want them to sign.
- As with any legal document, it’s always a good idea for you to have your attorney review it before you put it into use.
- Keep the non-compete agreement simple and understandable for your employees.
- When your employee terminates, remind them of the agreement they’ve signed.
Hiring someone who has a non-compete agreement with your competitor:
What about the flip side? What if you are hiring an employee away from your competitor? Do you have to be concerned about their non-compete?
- If you are hiring someone who is working for a competitor, or has worked for a competitor in the recent past, ask the job applicant whether they have a non-compete.
- If they do, ask to see a copy of it. This will help you determine whether the restrictions in the agreement apply to your business.
- If you have any doubts, run the agreement past your attorney.
Remember, your competitor can enforce the non-compete agreement with an injunction that could end up costing your company money!
Check your competitor’s non-compete agreement closely:
Before hiring a worker, check your competitor’s non-compete agreement carefully to determine what specific restrictions it contains.
- Did their employer have them sign a Confidentiality Agreement which protects their trade secrets and other proprietary information?
- Are they restricted from soliciting that business’s customers?
You want to ensure that your new employee, and your business, comply with the restrictions in order to stand on strong legal ground.
Use your job offer letter to protect yourself:
You can incorporate language addressing a non-compete’s restrictions in the job offer letter you give to your new employee.
For example, your offer letter might state that the new hire is prohibited from bringing any of their previous employer’s trade secrets, client lists, property or confidential information with them.
Warning: Interpretations of non-compete agreements vary!
Realize that your interpretation of the non-compete might differ from your competitor’s interpretation.
Once, I was about to hire someone who had worked for a staffing company in King County, a market I didn’t serve. She had a non-compete restricting her from working for a staffing company within 30 miles.
“No problem!” I thought, since my offices in Gig Harbor and Kitsap are a lot further away than that.
Much to my surprise, the King County staffing company owner measured the distance “as the crow flies” and saw me as a competitor, threatening to enforce the non-compete agreement if I hired her former employee.
A word of caution about non-compete agreements:
Poaching an employee from a competitor can sometimes be an unsought opportunity — but be careful.
An unhappy employee, or one that seeks better opportunity, may approach a competitor to see if greener grass grows in their office. While this might feel like a great opportunity to gain market share, client trade secrets, and do a little corporate espionage, just a word of caution:
If you talk with this person and they are willing to bring their employer’s confidential and proprietary information to your business, keep in mind that they will most likely be willing to take yours to someone else.
Ask yourself if this is the type of employee that will best represent you and your business in the long run.
Non-compete agreements can certainly be a good tool to protect your company’s interests.
Run yours past your attorney before implementing it to be sure it’ll stand up in court.
With the job market improving, it’s believed that two out of three workers are seeking new jobs. Make sure if your talent walks out the door, your clients don’t walk out with them!