A lot of companies have a stack of signed non-compete agreements on file, and they assume that they will protect them in the event that a key employee leaves and wants to work for a competitor. But just because you have a signed agreement doesn’t mean it will work the way it’s supposed to.
The law concerning non-compete agreements changes frequently, and it’s a good idea to review these agreements regularly with an attorney to make sure they’re up-to-date. This is especially true if you have employees who work in more than one state.
Here’s a look at some of the issues that can come up:
Have the employee’s responsibilities changed? Last year a court in Massachusetts threw out a non-compete agreement signed by a staffing company COO who left to form a rival company. The agreement had been signed 15 years earlier when the employee was first hired as a branch manager. The court said the non-compete couldn’t be enforced because the employee had been promoted several times over a 15-year period, and his job simply was no longer the same.
Other courts have decided that a non-compete can become unenforceable if the employer demotes a worker, changes his or her responsibilities, or alters the terms of compensation (such as by eliminating a commission plan).
It’s a good idea to review non-competes for long-term employees or for any employees whose responsibilities have changed recently. This is especially true because the specifics of the non-compete might need to be updated to reflect the employee’s new job duties.
If an employee’s job has changed, it might be wise to ask them to sign a new non-compete. But be careful – a non-compete, like any contract, requires “consideration,” meaning the employee must get something if he or she gives something up. A new job might qualify as consideration, but continued employment might not – especially if the employee is at-will and could be fired at any time anyway. It might be necessary to offer the employee some extra benefit in return for signing a new agreement.
Mention it in the offer letter? If you want a new employee to sign a non-compete, it can be a good idea to mention this requirement in the offer letter. This could prevent an employee from arguing that the non-compete wasn’t part of the initial job offer, and so any agreement he or she signed later required additional consideration.
Are employees telecommuting? Non-competes can become very complicated if workers telecommute. For instance, a Philadelphia company with offices in New York and Washington, D.C. hired two employees who lived in the New York and Washington suburbs. The two signed agreements not to compete within a 250-mile radius of the company’s offices. Eventually the employees left and began working from their homes for a business in Detroit. Was this legal?
A federal court split the difference and said the employees could perform certain functions from home for the Detroit business, but not others. The case clearly shows that geographic limits get very complicated in an online world.
How long does the agreement last? Suppose an employee’s non-compete says that he or she can’t compete with you for a year after leaving. You don’t discover that the employee is now working for a competitor until nine months down the road. If you take the employee to court, how long must he or she stop working for the competitor – the remaining three months, or a full year from the time you complained?
Some non-competes are now being rewritten to say that the non-compete period starts all over again if the company discovers that the employee is illegally competing.
What if the company is sold? An employee at an office supply business signed an agreement saying he wouldn’t compete for a year after he stopped working for the company. In 1996, the business was sold to a new owner. The employee left in 2009 to work for a competitor. A federal appeals court sided with the employee, saying that he “stopped working for the company” in 1996 when the business was sold – and not in 2009 when he resigned.
Beware of severance agreements. A lot of “standard” severance package agreements say that they supersede all other agreements between the company and the employee. Be careful! That could mean that the non-compete is no longer legally valid.
A good approach can be to have the severance agreement specifically refer to the non-compete, and say that the severance payment is in part further “consideration” for the employee’s promise not to join a rival business.
As you can see, non-competes are full of traps. It’s good to have them reviewed on a regular basis, and not just assume that everything will go according to plan.
