In this latest installment from the HR Landscape article series, Howard Kesten of APA Search gives us a clear, concise look at non-compete agreements and the pros and cons for both employers and job seekers.
As aftermarket recruiters we are always getting queried on the value of non-compete agreements by our client employers and/or on the liability of non-competes by our industry candidates.
There are some obvious benefits for the employers, but there are also some not-so-obvious liabilities. For the employees or job seekers, there also are obvious liabilities as well as some not-so-obvious benefits.
What is a Non-Competition Agreement?
A non-competition agreement is a contract between an employee and employer that restricts the ability of an employee to engage in business that competes with his/her current employer. While the employer can’t force an existing or potential employee to sign a non-compete agreement, an employer may terminate, or choose not to hire someone if they refuse to sign. When challenged, courts will go to great lengths in considering factors to determine the reasonableness of the non-compete.
The Major Components of a Non-Competition Agreement
The major components of a non-compete include sections that are titled Non-Compete, Non-Solicitation and Confidentiality.
These three main components of the agreement will all have related time frames such as one or two years. Once the employee leaves the company with which they have a non-compete agreement, this timeline remains, regardless of how many different employers you might work for during that time frame.
The Non-Compete section of the agreement will typically identify the types of companies, as well as specific companies, you cannot work for. The Non-Solicitation section will typically ask you to agree not to solicit the company’s employees for employment elsewhere. The Confidentiality section will require you to maintain the privacy of any information that would be proprietary to, and only known to, employees of the company.
Non-Compete Agreement Benefits for the Employer
- Proprietary and confidential information can be protected during the length of the agreement.
- The company is less likely to lose key customers when an employee leaves to go to work for a direct competitor. Employees are likely to stay longer with the company because most employees who have signed a non-compete respect the agreement or simply don’t want to challenge it.
Non-Compete Agreement Liabilities for the Employer
- An overly restrictive non-compete agreement can limit a company’s ability to attract the best talent.
Recently, we performed a vice president of operations search for an industry client. The client had some very unique and proprietary manufacturing techniques that they had every right to protect. The attorney who authored their agreement was overly aggressive and included far too many restrictions into the agreement. Out of the five finalist candidates we presented for the position, three of the candidates (of which two were the best out of the 5) withdrew themselves from consideration because they had legitimate concerns about their ability to find alternative employment if they left the company.
- Defending a poorly written, overly restrictive non-compete can be very time-consuming and expensive.
If the non-compete is poorly written and overly restrictive, chances are you are going to lose the legal battle if the agreement is challenged in court. If you decide to re-write the agreement at a later date or create a new agreement, there are a whole new set of challenges and laws you have to deal with to require tenured, existing employees to sign a non-compete agreement.
When creating a non-compete, work with an attorney who understands state laws and will resist the urge to copy another company’s non-compete. Laws governing non-competes, which vary by state, can be found and downloaded using the link accessed here. The study was recently done by the law firm Beck Reed Riden LLP.
- Introducing a non-compete agreement to existing employees might hasten their decision to leave the company.
Simple Rules to Consider When Writing the Non-Compete
- The non-compete must protect a legitimate business interest of the company. That could include trade secrets and customer data. The employer must be able to prove that the company took the appropriate measures to keep the information secret.
- The non-compete must be reasonable in scope, time and geography.
- If the agreement is so restrictive that it eliminates any opportunity for the employee to find employment in their industry, it will not hold up.
- Non-competes for existing employees – and sometimes new employees
in some states – must include some form of “valid consideration.” This can be in the form of cash or some other valuable consideration such as a promotion or equity opportunity.
- It’s always prudent (but not always required) to include some valid financial consideration when asking a new employee to sign a non-compete.
If you have to go to court at a later date, it will help to support your case.
Job Seekers / Employees
Non-Compete Agreement Benefits for the Job Seeker
- Signing a reasonably written non-compete is often the gateway to jobs in many of the most prominent companies. Signing the non-compete shows the employer that your intent is to stay with the company long-term. Candidates that overly negotiate a reasonable non-compete are often taken out of the running by the employer.
- As an existing employee, signing a non-compete agreement might be the gateway to a more senior corporate position or financial gain.
Non-Compete Agreement Liabilities for the Job Seeker
- Legal assistance in reviewing, negotiating and/or defending a non-compete can be costly.
- The non-compete could include overly restrictive language making it difficult to find alternative employment if you leave the company.
- The required length of time of the non-compete might make you a less desirable candidate in your industry segment when the non-compete expires, due to the time you’re “out of the game.”
Facts to Consider When Asked to Sign a Non-Compete
- If you’re not an attorney – you need to engage an attorney who is an HR specialist.
- Ensure the agreement is not too restrictive and that you will be able to secure another position if you leave.
- Don’t assume that you can get out of the non-compete.
- Make sure that the non-compete addresses termination. Ask the question: Is the non-compete enforceable if they fire me?
- During the interview process with a new prospective employer, ask if you will be required to sign a non-compete before accepting a position and resigning from your job. If so, make sure to review it thoroughly before resigning from your current company.
- Understand that if you sign the non-compete and go to work for a restricted competitor, it’s possible that the new employer can be forced by the courts to terminate you.
- If you breach your agreement you can be sued by your employer and they can collect cash compensation from you. This is referred to as “liquidated damages.”
Non-competes will continue to be a requirement of many companies. A business has the right to protect its tangible and intangible assets. Remember, non-compete agreements are not “one size fits all.” Whether you are an employer or job seeker, hire a qualified attorney who resides in your home state and is familiar with the changes and latest rulings regarding non-compete agreements.
Please note that the information provided in this article is not legal advice, nor is it a substitute for proper legal research. It is provided for informational purposes only. Our advice is to always consult with an attorney when entering into any type of employment agreement.
Editor’s Note: Have questions about job searches, interviews or finding (and keeping) great employees? Send them our way and Howard may answer them in an upcoming feature! Send your questions to AMN Editor Amy Antenora at [email protected].
For nearly three decades, APA Search has helped numerous aftermarket companies find great talent. The firm has worked with clients to help fine-tune their organizational structure as well as develop successful succession strategies. In the coming weeks, Howard Kesten and APA Search will continue share with AMN readers practices that will help keep your company staffed with the most qualified executives, rather than the most available. If you’re a career-seeker, we’ll provide you with the secret sauce for effective and successful interviewing. Stay tuned!