Consider this scenario: You oversee an ERP implementation for a client, and she’s so happy with your work, she offers you a plum job on her staff. At the same time, the president of a competing consulting firm hears about the great job you did and tries to hire you away. If that wasn’t enough, that client’s competitor wants a similar treatment for its ERP implementation and insists that you head up the project.
While this would be a major ego boost for any consultant, a potential deterrent to accepting any of these offers is a noncompete agreement—which many consultants are asked to sign with a client or consulting firm while executing a project.
In this article, we’ll provide you with some facts and tips for protecting yourself from the potential pitfalls of signing a noncompete agreement.
What does a noncompete accomplish?
As a rule, many companies—especially in the IT sector—include a noncompete agreement as part of their employment contract. Sudhir Kamath, an account manager with Bethesda, MD-based consulting services firm Crescent Systems explains why: “Very simply, a noncompete agreement protects our business interests,” Kamath said. “We’re in the business of providing services to our clients. We profit from the information we provide to our clients.”
Consultants use that information to do their jobs, but it’s also possible that they may then “pass on that information to a competitor or even use it to compete with us,” Kamath said. “This is unacceptable and something any consulting or IT company would do its best to prevent.”
Are noncompetes enforceable?
What exactly a noncompete can control largely depends on the laws of the state in which the noncompete agreement is applicable. Some state laws give employees the right to test the job market, and some even go so far as to prohibit noncompetes altogether.
But the lines between states are still blurry when it comes to this issue. In a recent case, Newark, NJ-based Internet-phone company Net2Phone sued two of its former employees for joining its Santa Clara, CA-based competitor, Dialpad (who has also been named in the suit), despite the fact that the workers had signed a noncompete agreement. Although the New Jersey judge issued an injunction preventing the employees from working at Dialpad, one of the defendants claims that the more liberal California laws should apply since he now lives and works in that state.
Ask the right questions
Because the issue is hopelessly tangled, signing a noncompete agreement calls for careful evaluation. Here are some things you should consider:
- What is the scope of the noncompete agreement? What specific areas of work are restricted? Does the contract apply to the particular state in which you work, or is it all-encompassing? Make sure you know the contract boundaries and understand exactly how it will affect you should you decide to leave the organization. An important factor to bear in mind is that legally, a company cannot prohibit employees from utilizing their skills in their company of choice unless it can be proven that the employees have used, or are using sensitive information gleaned from the previous company in their new position.
- How does the agreement define “sensitive” or “confidential” information? This is particularly important to consultants in the IT sector. For example, it’s possible for a network administrator working at a behemoth company like Coca-Cola to administer Pepsi’s network without compromising any “sensitive” information at all. However, although it is understandable for a company to be wary of compromising integral information, they should still not ask any employee to sign an unreasonable noncompete that is too strict. Ask the company to define clearly what it considers to be “integral information” so you can steer clear of any infringements.
- Does the contract specify a time frame within which you cannot work for a competing company? Naming a specific time frame is potentially the most important clause in a noncompete. If no time frame is specified, it could potentially work against you if you decide to contest it. Although an expensive legal process might turn the odds in your favor, it’s better to take care of this detail on the front end.
Don’t forget to negotiate
You’re thinking: If it’s so much of a hassle, why sign such an agreement at all? Although a recent TechRepublic poll reveals that most members advise against signing noncompetes, you may not have a choice. These days, a noncompete, nondisclosure agreement is a basic requirement in the IT industry. Kamath believes that “refusing to sign or asking to negotiate a noncompete can often raise eyebrows. We, for example, would assume that a consultant intends to compete with us in some way. Signing a noncompete is usually a nonnegotiable issue. At best, you could possibly negotiate the duration of the noncompete clause and possible compensation for any breach.”
As with many legal documents, you should seek the advice of an attorney before you sign a noncompete. According to George W. Keeley of Keeley, Kuenn & Reid, a law firm specializing in the protection of intellectual property, “Noncompetes have to be reasonable to be enforceable. Reasonableness is determined by the courts, based on the specific facts in each case. Primary attention is given by the courts to the geographic scope of the noncompete, the duration of the noncompete, and the type of activity the ex-employee is precluded from engaging in.”
The bottom line for a consultant, says Maryland-based employment lawyer Cynthia Thomas Calvert, is to “Be careful what you sign; negotiate the shortest duration for the noncompete or the most limited description of what constitutes a competing employer; and don't give up hope if you are terminated and want to go work for a competitor. But make sure your new employer is aware of the noncompete.”
Have you ever signed a noncompete agreement? What were the stipulations of the contract? Did it prevent you from changing jobs or taking on a new client? Post a comment below or send us a note.