Is yours is a "people" business that relies upon the solid relationships that your employees develop with customers and referral sources? Or, is a proprietary and guarded business model, pricing matrix, or product idea the cornerstone of your business success? If you answered "yes" to either of these questions, then the loyalty of your customers (also known as "customer goodwill"), or the confidential information used to manufacture and sell your product, are valuable business assets - perhaps your most valuable.
If one of your employees leaves you for a competitor, or - even worse - to start her own competing business, can the employee use that "goodwill" to pirate away your customers? Can she take and use for herself the highly-guarded pricing model, customer list or product information that is the lifeblood of your business? The answer to this question may depend on whether the departing employee signed an enforceable covenant not to compete.
A covenant not to compete -- also referred to as a "noncompete," "nonsolicitation" or "nondisclosure" agreement - is a contract between you (the employer) and your employee. In that agreement, the employee essentially agrees that, for a period of time after her employment terminates, she will not work for a competitor, start her own competing business, otherwise attempt to do business with your customers, or use any of your confidential business information. The result - the departing employee cannot pirate away customers or use for herself the proprietary information that you spent time and money developing. In Massachusetts, an employer can use a noncompete agreement to protect its customer goodwill and confidential information if (1) the agreement is reasonably limited in time and geographic scope to the protection of that goodwill or confidential information, and (2) the employee received something in exchange for signing the agreement.
A noncompete agreement is a valuable tool for many employers. Employers must be aware, however, that Massachusetts courts have limited the reach of noncompete agreements under certain circumstances. If you are not using noncompete agreements in your business, consider the resulting exposure. If you are using noncompete agreements (or if, by this point in the article, you have decided that you should be), consider the following.
First, you need an agreement that is carefully drafted with the needs and scope of your business in mind. A noncompete agreement is not appropriate for every business, and it is certainly not necessary for every employee within every business. An employment lawyer (including this author) can draft the right noncompete agreement for your business, and can advise you concerning which employees should sign the agreement. For your part, make sure that, during the drafting process, your lawyer fully understands the nature of your business.
The next step, of course, is to obtain the employee's signature to the agreement. Even then, however, your work is not done. Here are some things you should keep in mind when presenting noncompete agreements and after your employees sign on the dotted line.
- Do not minimize the obligations that the employee has agreed to. If you did this right, you (along with your attorney) have already determined long before obtaining a signature that a noncompete agreement is necessary for a particular employee or group of employees. When you present the agreement, tell your employee what she is agreeing to: During her employment, and for a certain period of time thereafter, she cannot work in a particular industry, and/or she cannot do business with any of your customers, and/or she cannot disclose certain information. Once you have a clear and carefully drafted agreement, do not allow extraneous conversations to create confusion about the employee's post-employment obligations. No court will look fondly on an employer that asked its employee to quickly sign a noncompete agreement as one of a large stack of documents, or told that employee to "just sign this. It's nothing."
- On the other hand, do not trap your employees. Communicating clearly to your employees does not mean threatening those employees or "trapping" them with the agreement. Ideally, you should inform a candidate when you extend her an offer of employment that she will be required to sign a noncompete agreement as a condition of employment. Do not wait until the candidate accepts your offer and relocates from a former job. If you determine that a current employee should sign a noncompete agreement, however, you should give the employee something (that is, other than continued employment with your company) in exchange for signing the agreement. Consider, then, the feasibility of presenting the noncompete agreement in conjunction with a planned promotion or salary increase. In any event, tell the employee that she is free to consult counsel before signing the agreement - and then actually give the employee time to do so before she signs.
- Comply with your obligations under the agreement! This seems like common sense, but is often overlooked. The rule is simple: Employer agrees to do "X" ("X" can be something as simple as paying a bonus to, or increasing the salary of, the employee). In exchange for "X," employee agrees to the restrictions contained in the noncompete agreement. If you as the employer fail to do "X," your employee may not have to abide by the agreement's restrictions. The result - your noncompete agreement is useless.
- Consider asking employee to sign a new agreement if the terms and conditions of her employment change. If the terms and conditions of employment change - for example, when the employee is promoted, demoted or her salary changes - consider asking the employee to sign a new noncompete agreement. Whether a new agreement is necessary depends on the severity of the change,the nature of your business and the nature of the employee's specific job duties.
- If you identify confidential information in the agreement, treat that information as confidential within your business. Perhaps your noncompete is based on the premise that certain confidential and proprietary business information is the lifeblood of your business. If so, ask yourself how that information is stored, handled and distributed. Where and how is the information contained? Locked files? A computer database with restricted access? Do employees who have not signed the agreement have equal access to the information? You will have difficulty arguing that the agreement was "necessary" to protect confidential information if you took no steps to guard the confidentiality of that information.
You can easily replace desks, chairs, phones and office supplies. The loss of talent is often harder to absorb. No agreement will, by itself, insulate your business from the risks associated with departing employees. If your business depends on the intangible assets embodied in your most valued employees, however, you must ask yourself whether your business can afford to be without noncompete agreements.
Janie Lanza Vowles is an associate at Roncone Law Offices, P.C. in Leominster, Massachusetts. She has advised businesses in various industries on the drafting and litigation of noncompete agreements. Ms. Vowles also litigates employment discrimination claims, general business disputes, product liability claims, and domestic relations matters. If you have questions about this article, or other employment issues, you can contact Ms. Vowles by phone at 978/534-2444 ext. 15.