A recent study from the Economic Policy Institute suggests that a staggering 60 million workers in the private sector have signed non-competes, raising the question of whether you should require one for your employees?
Let’s start with the basics: A non-compete is a document you have workers sign when they join the company that basically states that they can’t work for a competing business – or starting their own similar entity – within a pre-defined period and sometimes within a certain geographical area. The idea here is that they won’t be sharing proprietary information such as customer lists or insider info on how you run your company with your competitors or using it down the road for personal gain. Other off-shoots of these types of employer-employee contracts include non-solicitation agreements, which prohibit employees from approaching customers or even other employees should they leave the company, and general non-disclosure agreements, which prohibits the sharing of information crucial to how you run your business.
On the one hand, having your employees sign a non-compete is beneficial because it protects your investment. If you are going to go ahead and pour money into getting a new hire up to speed with your business – or even your industry overall – you’d like to know that you’ll get a return on that investment in the form of them staying with your company for the long haul! In addition, these agreements can be crucial to protecting your intellectual property and preserving your business.
The trouble with these non-competes is that they are a real
pain to defend in court. In an article in Investopedia,
experts note that generally, courts don’t look favorably on non-compete
agreements that are overly vague or that they deem “unreasonable” such that an
employee would have to basically completely change careers or move to another
country simply to be able to work again. With this in mind, you should consider
these four rules when crafting your non-compete:
Time’s up: In order to make your non-compete valid, you should specify
how long the non-compete is valid for. Investopedia notes that this is likely
different for different employee levels, as well as across levels. A court
would likely deem a three-month non-compete for a fitness instructor reasonable,
whereas an engineer or key executive may be subject to non-competes that last
up to five years. Essentially, you must put an appropriate time period on it
that considers their role and access to proprietary information.
Geography: A Hollywood
exec telling a young starlet “you’ll never work in this town!” may fly in
tinsel town, but it won’t work in your neck of the woods. Again, you’ll want to
consider the role of the employee here – a hairstylist might have a non-compete
that prohibits them working within a ten-mile radius of their existing salon,
whereas a sales person might have their territory extended to several states
(especially if it captures their key sales territories). Craft a geographical
catchment area that makes sense to protect your business without forcing the
employee to pick up their entire lives.
Employee Impact: As we
touched on before, if your non-compete agreement would effectively prevent them
from obtaining gainful employment without a big relocation or a major career
change, a court is far from likely to find it fair. Therefore, make sure that
the non-compete doesn’t strong arm your employees into staying!
Beyond the confines of your company and even your employee, the courts also
like to consider whether your non-compete effectively stifles competition in
your industry, to the point that you become a monopoly. This one could land you
in some serious hot water, so you’ll want to make sure that you tread carefully
A further key consideration here is whether your state even ALLOWS non-competes. On the back of the recession and a tight job market that has since exploded, many states hunkered down and began severely restricting the terms of non-competes. Beck Reed Riden has a great infographic for download that they update periodically that can keep you in the loop! Meanwhile, at the federal level, a bill introduced in the Senate – dubbed the Workforce Mobility Act – seeks to “prohibit employers from entering into, enforcing, or threatening to enforce a covenant not to compete with any employee of such employer.”
Should you choose to move forward with a non-compete, our best advice is to craft your agreement so that it is in focus and very explicit regarding what employees can and can’t do after they leave your business. Finally, the agreement should be reviewed by a lawyer to make sure that it is fair to you and the employee and would hold its weight in court if ever challenged!