Use Noncompete Agreements to Help Protect Your Business
From
by Tim Knox
Published on this site: January 31st, 2006 - See
more articles from this month
Question: One of my former employees has started a
competing business and is calling my clients and trying to
steal their business from me. Do I have any legal recourse
against him? - Brad J.
Answer: I hate to break this to you, Brad, but unless
this former employee signed a noncompete agreement while on
your payroll, there is probably very little you can do to
stop him from wooing your customers. You should discuss the
situation with your attorney, but unless this person is also
breaking the law in some other way (using stolen trade secrets,
for example) your attorney will probably concur with me.
Renegade former employees riding the free enterprise wave
is one reason noncompete agreements are gaining in popularity
among employers who hope to use them to help protect their
business from competitive threats launched by former employees.
Many employers are now demanding that key employees sign noncompetes as a stipulation of employment. While signing
noncompetes usually doesn't sit well with employees who view
them as potential roadblocks to their upwardly mobile career
path, many businesses will not hire a key employee without
his or her signature on the dotted line.
A noncompete agreement is a formal contract between you and
your employees in which they promise not to use information
or contacts pertinent to your business in a competing situation.
In other words, they agree not to take everything they learn
working for you and put it to use for someone else. This could
mean going to work for a competitor or starting a competing
business of their own.
While not popular with employees, noncompete agreements are
a good way for employers to keep key employees on the payroll
and protect the company's proprietary information. That said,
do not go overboard with noncompetes: not every employee should
be required to sign one. If an employee does not have access
to sensitive information, customer or accounting data, or
is integral to the overall success of your business, there
is no need to have them sign a noncompete. The janitor, for
example, poses very little threat to your business if he gets
a job with a competitor. Your sales manager, on the other
hand, can devastate your business by hooking his wagon to a competing
horse.
Which employees should sign noncompete agreements? While
the prerequisites vary from business to business, the following
is a good general list. The term "employees" represents
executive level, management, supervisory, and non-management
personnel relative to that example:
- Employees involved in research or product development.
- Employees involved in the design, fabrication, engineering,
and manufacturing process.
- Employees who service products made and sold by your
company.
- Sales and service employees who have regular contact
with customers or sensitive customer information.
- Employees with access to sensitive business information
or trade secrets.
- Most importantly, employees who have sufficient information
about your business that would allow them to start a competing
business.
Most business experts agree that noncompete agreements are
generally a good way to protect your business. The downside
is that noncompete agreements are often difficult to enforce
and in some states, may not be enforceable at all. Many state
courts have ruled that noncompete agreements are too restrictive
on an employee's right to earn a living.
In California, for instance, noncompetes are generally only
enforceable in connection with the sale of a business and
not for employees. In Alabama, noncompetes are generally enforceable
in only two contexts: the sale of a business and in connection
with employment - but even then the enforcement requires that there be a valid interest worthy of protection.
Some states require that the noncompete be signed at the
beginning of the employment relationship and will only consider
the enforcement of a noncompete signed after the initial employment
date if the signing of the noncompete was accompanied by a promotion, raise in pay, or other event that
elevated the employee to a more important role within the
company.
To be enforceable, noncompete agreements must be reasonable
on three accounts: Time, geography and scope. Regarding time,
you can't restrict someone from competing with you forever,
so one to three years is the accepted time period for most
noncompetes.
As to geography, you can enforce restriction in the general
area where you conduct business, but you can not enforce the
restriction beyond those boundaries. And for scope, the agreement
can restrict certain actions on the part of the employee,
but can't be so generally restrictive that the employee won't
be able to earn a living working in the same industry in a
noncompetitive position.
One interesting thing to note: noncompete agreements are
not enforceable against certain "professionals,"
like doctors, CPAs, and lawyers (who do you think writes all
those noncompetes).
At this point, Brad, the best thing you can do is contact
your attorney to see if you have other grounds for suit, then
contact your customers and let them know what's going on.
Explain the situation regarding the former employee, but
do so calmly and resist the urge to tell them what you really
think of this guy. Showing your anger to the customer is not
going to help you keep their business.
Reaffirm your relationship with the client, tell him how
much you value his business, remind him of your track record
and level of service, then ask one simple question: What can
I do to make sure your business stays with me?
Here's to your success!
Tim Knox Entrepreneur, Author, Speaker
http://www.prosperityandprofit.com
http://www.dropshipwholesale.net
http://www.smallbusinessqa.com
http://www.timknox.com
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