Employee Non-Compete Agreements: Bad Idea? Maybe

Image courtesy of FreeDigitalPhotos.net
Image courtesy of FreeDigitalPhotos.net

by Raven Willis

Every business owner thinks that their company is the best out there, just like every parent thinks that their kid is the coolest kid that ever existed.  This is good.  The love we have for our “babies” keeps entrepreneurs plugging away, creating jobs, and making the U.S. great, and keeps parents from inflicting major bodily harm on our little ones who have continued to invade our personal space for what seems like a summer vacation that will never end!!!

With zeal and determination, I have seen owners and managers do what they can to safeguard their hard work by insisting that their employees sign non-compete agreements.  This always make me very, very leery.  Generally, we don’t like to prevent people from working (and I mean the royal “we” as I refer to the United States government). We like work.  If at all possible, we don’t want people on public assistance, and we sure as heck don’t want folks breaking through windows trying to steal stuff to feed their family because they can’t find a job.  Get the picture?

But on the other hand, we do want to encourage businesses to invest in their employees, therefore creating more jobs and making the U.S. even awesomer.

So there has to be a balancing of both interests when using these non-compete agreements with employees.  Here are a few tips to help you as you either create a non-compete if you are an employer, or review a non-compete if you are an employee.

Tip #1: Limit the Types of Employees Who Sign

It’s probably a dumb idea to make a non-compete a standard form for all of your employees to execute.  First of all, you will have to monitor compliance, which NOBODY has the time or resources to do.  I mean, are you really going to try and nail that Administrative Assistant who went to work for a competitor because he got a $2 per hour increase?

Secondly, if you don’t go after all the folks violating their agreements, it seriously weakens your position when you do go after the VP of Research and Development who now works for your rival located right across the street.  They could reasonably argue that your company has waived its right to enforce the non-compete because it didn’t enforce anyone else’s.

The moral of the story is to be selective about who signs these.  Here’s a good rule of thumb that may help: the chosen employee needs to be a crucial part to your business and have access to confidential information, to where if they left and used this info with a competitor, it could seriously jack you up.  Boom.  Done.

Tip #2: Include “Consideration”

When I was in law school, I had a professor who was also a federal judge in Fort Worth.  He spent literally a week in our first year Contracts class on explaining exactly what “consideration” is.  In his thick Texas accent (pronounced “tek-‘shush ak-‘shient”) he patiently tried over and over again to explain this fundamental, strangely elusive, but essential component of a contract.  Of course the term finally clicked, so let me boil it down it down for you in my super-stupid-simple summary: if you want to make a deal with someone (a.k.a. create a legally binding agreement), you have to give them something in exchange.  Easy-peasy.  So, why didn’t they just lead with that in law school, I have no idea.

What this means for employers is that you can’t just give the employee the non-compete, have them sign it, and that be the end of it.  Well, technically you can, but the agreement won’t be worth the paper it’s written on.  You have to give them either a bonus, pay increase, promotion, or anything that has value, in exchange for their promise to not go work for a competitor.

Someone reading this in an at-will employment state is probably thinking that the employee being able to keep their job in exchange for signing the agreement should do.  Probably not.  Courts don’t usually consider continued employment as sufficient consideration.  However, if you have a prospective employee sign one as a condition to employment, that’ll probably do.  Heck, bundle the non-compete with the rest of the pre-employment paperwork.  Most people will sign anything because they’re so happy to have a new job!

Tip #3: Tailor the Terms VERY Narrowly

Don’t go throwing all sorts of crap in the agreement that says an employee can’t work for anyone in the U.S. for a period of 20 years, and if they do, you’re gonna come after them and blah, blah, blah.  State laws vary on what is considered a reasonable time frame and scope, but generally, the less restrictive to the employee, the more likely the non-compete will be upheld in court.  So make the time period as short as possible.  A year?  Okay, maybe.  Five years?  Mmmm…probably not wise.  Can’t work for a competitor in the same city?  Maybe.  Can’t work for a competitor in the same country?  Uh, probably not.  Remember, we like people to work, and we want to encourage people being able to find a job.

So that’s that.  I hope these tips for employee non-compete agreements are helpful.  Any questions?  Send a shout-out in the comment section below.

Thanks for reading!

 

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