It’s a story that can induce a million nightmares: the disgruntled employee who quits your small business only to take both your trade secrets and clients and start his/her own competing company—and within your own neighborhood, no less! Unfortunately, without proper legal safeguards in place, like a non-compete agreement, which prohibits an employee to work for a rival or launch a similar business within a certain timeframe and geographic radius after leaving your company, such a nightmare scenario is tough to avoid.
For small business owners whose revenue may hinge on proprietary or confidential information (e.g. a secret recipe or software application), having employees sign a non-compete contract may be a no-brainer. However, the agreement could be deemed unenforceable by the courts if the provisions are considered too draconian in scope, such as preventing an exiting employee from pursuing his/her livelihood in the same region and industry sector for five or 10 years.
If you’re a small business owner contemplating having your employees sign a non-compete, it’s imperative you heed these important guidelines well before anyone signs on the dotted line—particularly if you want the agreement to hold up in court.
Consult an attorney
Whether it’s a non-compete or a non-disclosure agreement, unless you’re a trained lawyer (and even then, only if you’re an attorney specializing in labor and employment law), you should always consult with a legal professional first before having your employees sign any document. Not doing so could open you up to a lawsuit filed by an ex-employee.
Sharron Senter, founder of the Boston-based Senter & Associates, a marketing consulting firm, strongly echoes this best practice. Prior to striking out on her own, Senter was the co-founder of Visiting Geeks, a small computer networking and security company that was sold in 2011. Having her employees, which at their peak numbered up to 10, sign non-competes was a necessary strategic move that protected the interests of her company, she says. It also provided her with the experience and insight to impart several lessons learned to small business owners when it comes to drawing up non-compete agreements, one of which is always use a lawyer.
“[This is for] two reasons: one, what you may be asking could be illegal; and two, why upset a valuable and well-trained employee over something that isn't enforceable by law?” she says, adding that most small businesses cannot afford to take legal action on a violated non-compete.
“Generally speaking, the responsibility of proof falls on the employer,” notes Senter. “This said, what's the good of the non-compete? It helps keep some employees honest.”
A non-disclosure might suffice rather than a non-compete
Small business owners who are concerned about employees leaking a trade secret might be better served having them sign non-disclosure agreements instead of non-competes. Or they can have them sign one in conjunction with the other. It all depends on the situation and what will give the small business owner better peace of mind when it comes to safeguarding the future of his/her business.
Todd Kulkin, a White Plains, New York-based lawyer who specializes in small business cases and has drafted a number of non-compete agreements, says employers need to assess what they’re trying to protect.
“For example, if you’re worried that someone who works in your factory, who’s kind of low in middle management is going to go off to a new employer and give away all your trade secrets, then maybe what you really want is a non-disclosure,” explains Kulkin, adding that nondisclosures are usually easier to enforce than non-competes. “If on the other hand, you’re worried that this person will learn everything they can about what you do and then go down the street and start their own firm or business doing exactly what you do using your secrets, then a non-compete makes sense.”
For most instances, Kulkin feels a combination of both types of contracts is the best solution. “The reason why you have a noncompete in conjunction with a nondisclosure if you’re a small biz owner is to protect your trade secrets,” he says. “The trade secret is a form of intellectual property, which doesn’t have a lot of tangible protection. It’s not like a trademark in which you can register or a copyright where you have certain rights.”
Making everyone in your business, from the vice president to the guy who works the french fries station, sign a non-compete agreement is ridiculous and contrary to the purpose of the document. Plus, according to Kulkin, it will never hold up in court due to the disparity in power between the employer and the low-level worker. (Although in that instance, again, you might be better served having these workers sign non-disclosures to eliminate your insecurities). Only those who are high up on the corporate ladder should sign noncompetes.
Be fair and reasonable
When putting together a non-compete agreement, avoid using draconian language and excessive terms. Think about if it were you signing the non-compete. Wouldn’t you want to pursue your livelihood eventually instead of being prevented from doing so for an inordinate length of time?
Kulkin offers an example of a client who had signed a prohibitive non-compete contract: “He was forced into a non-compete that kept him from using his own intellectual property in the New York area for five years,” he recalls. “It was completely unenforceable. He didn’t know what he was doing initially. It was like, “Oh [no], I signed this thing and I’m completely going to regret it!”
Joshua Weiss, CEO of TeliApp Corporation, a mobile application development firm based in Linden, New Jersey, says that small business owners have a duty to protect their survival and ought to take whatever measures necessary to ensure that—within reason, of course. Weiss, who founded his company in 2010, currently has a staff of 16 full-time employees, all of whom he had sign non-disclosures, confidentiality agreements and non-competes the day they were hired.
“I have had ideas stolen from me in the past and had to learn the hard way that as much as I'd like to think that all the people I choose to work with are trustworthy and good, some may not be,” he says. “It really shouldn't be a big deal for an employee to sign a non-compete so long as it is fair. For instance, I have software developers and if the company lays one off, or if one gets an offer from a competing firm, I have to make sure that none of the ideas in development at my company are used elsewhere. But the employee may believe that it is not fair for me to limit them to working for a competing company to one year after a termination event, since the job market in software development is difficult. So I have language that prohibits the developer from working at a competing firm that either has or intends to develop software that would be in competition with us.”
Having an employee sign a non-compete can also be a good deterrent to a rogue ex-employee who might depart with less than the best intentions. However, there are steps you need to take beforehand to ensure the legality of your non-compete. Not doing so could lay the groundwork for a costly and time-consuming lawsuit.