In working with business owners over the past 20 plus years, I’ve seen various approaches to how owners protect their businesses from the threats created by former employees and unfair competition.
Here are five do’s and don’ts for employers to consider when protecting their business.
1. DO USE NON-SOLICITATION AGREEMENTS. A non-solicit is used for two different purposes. One is to keep employees from soliciting other employees, so it will say that the employee agrees they will not solicit or encourage or attempt to coerce other employees or independent contractor from ending their employment agreement or their contractual relationship with the employer. The second purpose for a non-solicit pertains to customers or clients of the employer. The non-solicit is especially important for employees in sales positions. Non-solicitations are enforceable in almost every state, and courts regularly enforce them.
2. DON’T OVER-REACH. A common problem with many non-competes and non-solicit agreements is that agreements cover an excessively long time frame. Two years is commonly negotiated to a shorter period of time. Courts commonly accept six to twelve months with employees, and three years if it’s an owner selling a business. Other situations are often litigated. When the court asks, “What is the legitimate business reason for this lengthy non-compete agreement?” many companies don’t have an answer.
3. DON’T’ TREAT ALL INFORMATION AS CONFIDENTIAL. Information readily available to the public is not confidential. Many companies get their sales leads from public sources like professional directories and the internet, which are available to anyone in the industry. Any employer who claims they are protecting their valuable secret client sources is going to have to show that the information was not available to everyone else in the industry. Existing customer lists or unique sources are protected, but anything found through Google is not.
4. DON’T USE GENERIC EMPLOYMENT AGREEMENTS. I find a lot of companies that do business in multiple states use the exact same agreement in every state. Since laws vary by state, the same agreement may be enforceable in one state but not in another. I have also seen many employers who have their receptionist sign the exact same non-compete and non-solicitation agreement as a senior vice-president. Since their roles are very different, their employment documents should be very different. A cautionary tale can be learned from Jimmy John’s Enterprises, who recently paid $100,000.00 to settle a dispute over having low level employees sign non-compete agreements.
5. DO HONOR THE EMPLOYMENT CONTRACT. Many non-compete provisions are part of a comprehensive employment contract spelling out compensation, insurance and other conditions of employment. If the employer breaches the agreement by failing to pay all compensation due, failing to fulfill the insurance requirements, failing to grant equity or failing to meet some other obligation, the employee is relieved of all obligations under the contract. It is important for the employer, particularly upon termination, to make sure all obligations under the contract on the employer’s part have been met.
Paul Kellogg is an attorney in Cincinnati with the Phillips Law Firm, Inc. Paul’s practice focuses on providing comprehensive estate planning and probate services to families and business owners, as well as serving as outside general counsel to entrepreneurs and businesses where he provides guidance and advice on a wide variety of transactions and disputes. He can be reached at (513) 985-2500 or via email at [email protected]. Please explore Paul’s other articles on estate planning and business on the Phillips Law Firm Blog page.
The article is for educational and informational purposes only and does not constitute legal advice. Anyone contemplating taking legal action is urged to obtain proper legal advice from an attorney licensed in your particular jurisdiction.