Tag Archives: restrictive covenants

IF YOU WANT TO PROHIBIT YOUR FORMER EMPLOYEES FROM COMPETING AGAINST YOU, YOU BETTER HAVE THEM SIGN ON THE DOTTED LINE

 You have just hired a new employee.   Part of their job responsibility involves extensive contact with your clients.  You want to encourage the employee to form relations with your clients and provide excellent customer service.   You do not want to stand and monitor the employee to ensure that the employees become close, but not too close, to your clients.   You can prohibit your employees from later competing against you, and stealing your customers, if you are careful.   However, the rules that the Courts apply in this area make drafting a non-compete agreement, without the benefit of counsel, a  really bad idea. 

1.            Your Employee Must Sign a Non Compete Agreement.

     There is no such thing as an oral agreement not to compete. There is no such thing as a handshake deal. An agreement which prohibits a former employee from competing against you may not be enforced unless that employee has signed a contract reflecting that agreement.   Accordingly, a business owner with customers to protect should have competent counsel prepare a Non-Compete Agreement which should be presented to the employee for signature before the employee’s first day of employment.   This is the time in which an employee is typically most eager or positive about the job and most likely to sign a non-compete agreement.   If you decide to provide the employee with this contract months, or even years later, it is possible, perhaps likely, that they will be hesitant to sign it. At this point, the employee has already developed relationships with your customers and, therefore, it is likely that the employee will regarding a non-compete agreement, presented at this stage, as a sign that he or she is likely to be fired or as an indicator that you do not trust him or her.

  1. The Non-Competition Agreement Must be Carefully Drafted.

     There is no question that the law of Non-Competition Agreements was created by lawyers and Judges.   This is because the law is extremely detailed and nuanced and is a minefield for lay people.   Specifically, both the statutes and the case law are continually changing with respect to what constitutes reasonable restrictions on an employee’s post-employment conduct.  Generally, contracts which restrict an employee from working for a period in excess of two years are presumed to be unreasonable. Therefore, the carefully worded restrictive covenant will restrict an employee’s ability to compete for a more limited period of time, generally, one year.

     An employment contract may also be used to prohibit an employee from competing against a former employer within certain geographic areas. A two county radius will generally be enforced. However, a provision which prohibits an employee from competing in the entire United States or worse, the entire world, will generally be unenforceable. If the Court finds that the area restricted is, per se, unreasonable, the Court may re-write the provision to bring it into compliance with existing law. This is one of the few instances in which a Court is permitted to re-write the provisions of a contract.

     Generally, a company can only protect by contract its “legitimate business interests” with existing customers.  A non-competition agreement cannot be used to protect a company’s relationships with former or prospective customers.  This is because the purpose of a restrictive covenant is to protect “legitimate business interests” and relationships with former or prospective customers are simply too speculative to be termed “legitimate.”

     Non-competition agreements for employees appear, on the surface, to present a relatively straightforward matter. If you read the cases, however, you will see that this is not the case. Defining the boundaries of acceptable non-competition agreements has been a fertile source of litigation in which it is likely that millions of dollars have been spent. The wise and cost conscious employer will seek out competent counsel to draft an effective non-compete agreement which will be signed by the employee at the commencement of his or her employment. Waiting for the employee to be quit, or terminated, is generally a bad idea. 

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