Noncompete agreements: How to make them stick
As an employee, you need to be gainfully employed today while still protecting your right to earn a living in your chosen field should your current employment terminate.
Members of the Delaware Valley Chapter of the ACCA recently learned about noncompete agreements from a guest speaker, attorney Caroline Hyman Brooks.
Brooks said attendees were chiefly concerned with the issue of noncompete agreements when a business is sold.
She gave contractors an overview of noncompete agreements; how they can be used to protect a contractor’s interests; and what technicians who sign them need to know.
What is a noncompete agreement?
In an employment context, a noncompete agreement is a written contract between an employer and an employee, designed to protect the employer’s business interests. It restricts the employee’s ability to compete, directly or indirectly, with the employer for business, disclose the employer’s confidential or proprietary information to third parties, or solicit the employer’s other employees, clients, and business contacts.
As an employer, if I require all employees to enter into a noncompete agreement, does it matter when the contract is actually signed?
Yes. It is critical that the noncompete agreement be signed by a new employee before or at the time employment begins.
Like any contract, a noncompete agreement is a bargain for exchange and must be supported by adequate consideration. The benefit to the employee is employment; signing the noncompete agreement is a condition of that employment.
Once employment begins, continued employment alone is not sufficient to support the agreement. Some of the factors which, in multiple combination, may provide sufficient consideration include, but are not limited to:
- Change in job title;
- New duties and job description;
- Significant increase in salary;
- Additional benefits and/or perks, etc.
In short, there needs to be clear and significant financial and professional benefit to the employee in order for the noncompete agreement to remain in effect.
As an employer, does a prospective employee’s past noncompete agreement affect me?
Yes. If you hire an employee who is bound by a noncompete agreement, the prior employer can drag your business into court, seeking to enjoin your business from profiting from the employee and force your company to turn over any profits received in violation of the noncompete agreement.
You may spend a great deal of money in costs and attorney’s fees to wind up with an employee who cannot work for you in the capacity for which he/she was hired.
You should ask every prospective employee whether or not he has ever signed a noncompete agreement and obtain a copy of any agreement that the prospective employee entered into with his prior employer.
Always err on the side of caution, even if it means contacting the prior employer to confirm, in writing, that hiring the employee would not be in violation of the agreement, or if it means getting the employee’s written assurance that he is not in violation of a noncompete agreement as a condition of employment.
Should an employer draft and negotiate his/her own noncompete agreement?
No. A noncompete agreement is a legal document that must be limited in time, scope, and geography, or a court won’t uphold it.
While this agreement is intended to protect the employer, it still must recognize an employee’s right to move on and continue making a living within his or her profession, should the present employment relationship be terminated.
You should have an attorney prepare your noncompete agreement and negotiate any changes with the prospective employee or his counsel before the document is signed.
Should an employee retain counsel to review noncompete agreements?
Yes. Noncompete agreements are binding legal documents that are intended to restrict an employee’s rights both during and after the term of his employment.
Having an attorney review the agreement before it is signed and explain to the potential employee the intent of the agreement, will help that employee make a well-informed and intelligent decision regarding their future with this employer.
If an employer with offices in one state opens a branch of the same business in another state, can an employer use the same noncompete agreement for employees at both locations?
Maybe. Noncompete agreements are governed by the laws of each state. Validity and enforceability can vary drastically from state to state.
As an employer what, if anything, should I do when an employee with a noncompete agreement leaves my employ?
Make it part of the exit procedure to remind the employee that he is still bound by the terms and conditions of the noncompete agreement.
If possible, offer to provide the employee with a copy of the agreement and make yourself, or your attorney, available to discuss any potential conflicting future employment opportunities the employee may have.
If a dispute over a noncompete agreement ends up in court, who usually wins?
No one. It is costly and time consuming for all parties. The emergency nature of the litigation drives up the costs and requires immediate preparation and court attendance by all parties to the litigation.
Sometimes noncompete litigation ends up being the only way to resolve the conflict but, where possible, the parties, through counsel, should make every effort to resolve these disputes before they arise, or as soon as the parties become aware of them.