5 Essentials for Non-Compete Agreements

Posted on July 1, 2016 in Business Transactions, Employee Issues

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Well-crafted employment documents can protect your company from losing employees to the competition.

You’ve built a company. You’ve created valuable intellectual property, and you have a great stable of solid clients. You need employees to move the business forward, but the last thing you want to do is spend valuable time and money training your competitor–which is what a former employee has the potential to become after leaving your employ.

How can you protect your company? Through the careful use of non-compete agreements.

Why careful? Non-compete agreements need to be worded carefully because their basic purpose is to prevent a departing employee from working. Or, at least, from working in any capacity that’s the same or similar to what she was doing for you.

Courts (and the laws of your state) try to balance two perspectives. They want to reconcile the company’s need for protection with an employee’s need to obtain alternative gainful employment. Become too extreme in your wording (e.g., telling a file clerk he can’t work for a competing company anywhere in your state for five years after leaving your employ) and a court will strike down your non-compete.

Yes, you can come straight out and say “you can’t work for a competitor.” That’s the traditional form of non-compete. There are also a handful of other ways to prevent competition:

  1. Non-solicitation agreements. These kinds of provisions prevent employees from reaching out to your client and customer base (a fertile source of leads for the competition). They can also be worded to prevent former employees from poaching your current staff, luring them away to work for a competitor.
  2. Confidentiality and non-disclosure agreements. These ensure that any trade secrets your employee learns on the job stay with the company. They define the kinds of records and information deemed confidential and prevent the employee from disclosing them to a competitor or otherwise. The information really has to be proprietary, though. Don’t include public information–like a client list on your website–in your definition of confidential. It won’t fly.
  3. Work-for-hire agreements. Generally, intellectual property belongs to the person who created it. But not if you have a written work-for-hire provision. These terms ensure that ownership of any documents, software, inventions, concepts–anything–that an employee created on the job remains with your company. In other words, the employee was hired to create the work for you, not for her own purposes.
  4. Incentive compensation agreements. For companies that offer their employees bonuses, stock options or the like, your incentive compensation agreement ensures “loyalty through golden handcuffs.” For example, you can tie bonus entitlement to remaining with the company for a certain period of time (sometimes referred to as vesting). You can also allow an employee to keep a bonus, provided he doesn’t defect to a competitor within a certain time frame (if he does, he has to repay it).
  5. Employment manuals. Employee manuals (also known as handbooks or codes of conduct) provide a handy place–other than a separate written agreement–to bring all of your non-compete expectations to the attention of employees. And that way, you don’t have so many individual agreements floating about. Many employers use the manuals to explain, “This is how we do things here, and this is what will get you booted out the door.” Because trade secrets can be  shared so easily by electronic means, it also provides the company with a vehicle to express its communications policies. That includes the scope of permissible blogging by employees, especially if the blogging has anything to do with the company. Make sure your employees sign a form stating that they received and have read the manual.

These agreements and provisions require delicate wording. In other words, “Don’t try this at home.” Find an experienced employment attorney to work with your company. The wrong wording could make all the difference between protection and exposure.

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