Tired of employee turnover? Worried your employees will jump ship and give trade secrets to the competition? Before you ask your employees to sign a non-compete clause, learn a few legal considerations.
By A.X. Jones
The information economy is built on knowledge. Knowledge is generated by people. The non-competition agreement is a tool to help companies maintain control of these two crucial assets.
If you want your IT employees to sign a non-competition agreement, you should consult your attorney. Am I just a flack for billable hours amongst my fellow members of the bar? The answer is no!
What may seem to be a simple issue of a contract provision can actually become very complicated. Your lawyer is the best person to decide how a non-compete contract should be worded.
Here’s an example of a non-compete clause from the Internet Legal Resource Guide.
In a previous article , we examined this issue from the employee’s perspective. If an employee has signed a non-compete clause and wants to get out of the agreement, there are loopholes that may allow the employee to win his or her battle.
Factors to consider
A non-competition agreement for one employee may not be effective for another employee due to several factors:
- The state where the employee works, and that state’s law
- The state where the employment agreement was made, and that state’s law
- The work the employee does
- The work the employee can do
- Your investment in the employee
- Trade secrets the employee may know
- Proprietary business information the employee may know
- What activity you want to stop the employee from doing
- Whom you want to stop the employee from working for
- How long you want to stop the employee from competing
- How far—geographically speaking—you want to stop the employee from competing near you
- Various other factual or legal differences in state law and state courts that lawyers must sift through to arrive at a decision
As you can see, this is a complex issue. Copyright law may be complicated, but at least federal law covers most issues. The differences between the laws of one state and another state make employment law intricate in an entirely different way.
In the law, as elsewhere, an ounce of prevention is worth a pound of cure. If you are considering creating a non-compete contract for your employees, look at the list below for issues you’ll want to discuss with your lawyer.
What do I need to protect?
You should carefully consider the purpose of your non-competition agreement and how it’s intended to benefit your company.
The law does not always favor such restrictions. It could end up being costly if your employee decides to fight the agreement.
But, there are valid reasons for non-competition agreement protection. You might not want a former employee poaching your customers or using knowledge of your financial information to unfairly compete.
Even California law, which finds non-competes void, recognizes an employer’s need to protect trade secret information. Knowing the scope of the protection you require will help your lawyer create a satisfactory agreement.
How long do I need protection?
It’s unusual for non-compete laws to restrict talented people from working for lengthy periods of time.
Your lawyer will know how long the applicable state law will allow a non-compete to remain effective. In some states, one-year, two-year, or even five-year terms may be effective in certain employment circumstances. However, if a term is ruled unreasonably long, it could void the entire non-compete agreement. Given the rapidity of change in IT, it is conceivable a court might rule that a term that is reasonable for an auto mechanic is unreasonable for an IT professional.
How much space do I need?
The geographic limit on employment is also a factor to consider. Forcing folks to move away to find work is not always seen as good public policy.
Indeed, when IT professionals end up leaving one state with rigid enforcement of non-compete agreements for another more lenient state, such as California, which state ends up the winner? The geographic scope of a non-compete agreement is yet another issue that must be addressed under applicable state law.
More questions to consider
Other factors involved in the effectiveness of a non-compete clause include:
- What are the time/distance/scope-of-job limitations? Could the person still get work?
- What trade secrets, confidential information, or special business information might be at issue or at risk?
- What has the employer done to enhance the job or job skills of the particular employee, such as training and education?
- What did the employee get in exchange for the non-compete clause?
Don’t forget that there are non-legal issues to consider, such as how this might affect employee morale or loyalty. Suing a former employee, even for good reason, might send a wrong or misunderstood message to current or potential employees. This possible repercussion further demonstrates the importance of knowing why you need a non-compete agreement and why you might consider explaining such an agreement to your employees.
Talk it over with your lawyer. An attorney who regularly handles employment law can help you keep current on future legal changes. Paying for this service is far less expensive than the cost of litigation. You need good legal advice, especially when trade secrets or proprietary business information are concerned.
This article is for informational purposes only. It discusses legal principles in general terms only and not as they would apply to any particular person's factual situation. It is not legal advice nor does it create any kind of an attorney-client relationship. No warranty as to the accuracy or correctness or sanity of this information is made, expressly or implicitly. Each person's legal situation depends on the particular laws that may apply and that person’s own unique factual circumstances. Consult your lawyer. The amazing diversity and complexity of the justice system means you need a guide you can trust.
What would it take for your employees to sign a non-compete? A huge salary? More stock options? Have you ever told an employee that he or she couldn’t take a new job due to a non-compete contract? Post a comment below or send us an idea for a future topic.