Non-Competes
Non-competes can literally constitute the primary value of certain types of companies, by protecting trade secrets and confidential information as well as preventing key employees from competing with the company in either a narrow or fairly broad marketplace niche depending on the situation.
In order to be enforceable, however, they must be "reasonable" in all respects in light of the facts and circumstances of both your company and the particular employee's personal situation; otherwise, they will likely be thrown out or severely limited by a court. Nevertheless, contrary to rumor and supposition, they are veryenforceable if well drafted. Signing one carelessly can virtually cost an employee their career in that industry for all practical purposes. Having a non-compete in place for each key employee can result in a company being worth multiple times what it might be otherwise to a prospective purchaser of the business; whereas lack of a non-compete or an inadequate one can literally destroy the value of a company to a prospective purchaser.
They always require "timely and legally sufficient consideration" to the individual being restricted, in order to be enforceable; but unfortunately there is no bright-line test of what restrictions meet that standard. Getting one signed before that new employee comes on-board is optimal, and will generally be binding without payment of any additional consideration if its provisions are reasonable. Giving your existing file clerk a $1,000 bonus may suffice to bind her to a short non-compete; whereas having your national sales manager sign one may require some compensation along the lines of a new Lexus or some such. It all depends on the situation and the threat to the company posed by that particular employee.
The restrictions guidelines are a bit counter-intuitive for the business owner; i.e., they should be no broader or longer than minimally necessary to protect the inherent value of the company. The scope and duration must not totally take away the employee's "trade skills" or ability to make a living in their career path; i.e., they should be able to join a competitor in a different market area, or work in a slightly differentiated part of the same industry, or some such -- which is a very delicate balance from the employer's perspective. With lower echelon employees, the retractions should not exceed say one or two years in length; perhaps three if the employee is a very key player and a major threat to the company's very existence should he or she leave. He or she must receive for example a substantial cash bonus or deferred compensation plan in consideration for signing the restrictive covenants had they not done so before beginning employment with the company.
Whereas if the restrictions are embedded in a joint shareholders agreement between co-principals in the company, they can reasonably be much longer, for example five or seven or more years following departure of a shareholder from the company; since they were carefully bargained for amongst the shareholder group as equals, and the departing shareholder is likely receiving a substantial amount of money in a buyout of his or her stock upon departure from the company.
In order to be enforceable, however, they must be "reasonable" in all respects in light of the facts and circumstances of both your company and the particular employee's personal situation; otherwise, they will likely be thrown out or severely limited by a court. Nevertheless, contrary to rumor and supposition, they are veryenforceable if well drafted. Signing one carelessly can virtually cost an employee their career in that industry for all practical purposes. Having a non-compete in place for each key employee can result in a company being worth multiple times what it might be otherwise to a prospective purchaser of the business; whereas lack of a non-compete or an inadequate one can literally destroy the value of a company to a prospective purchaser.
They always require "timely and legally sufficient consideration" to the individual being restricted, in order to be enforceable; but unfortunately there is no bright-line test of what restrictions meet that standard. Getting one signed before that new employee comes on-board is optimal, and will generally be binding without payment of any additional consideration if its provisions are reasonable. Giving your existing file clerk a $1,000 bonus may suffice to bind her to a short non-compete; whereas having your national sales manager sign one may require some compensation along the lines of a new Lexus or some such. It all depends on the situation and the threat to the company posed by that particular employee.
The restrictions guidelines are a bit counter-intuitive for the business owner; i.e., they should be no broader or longer than minimally necessary to protect the inherent value of the company. The scope and duration must not totally take away the employee's "trade skills" or ability to make a living in their career path; i.e., they should be able to join a competitor in a different market area, or work in a slightly differentiated part of the same industry, or some such -- which is a very delicate balance from the employer's perspective. With lower echelon employees, the retractions should not exceed say one or two years in length; perhaps three if the employee is a very key player and a major threat to the company's very existence should he or she leave. He or she must receive for example a substantial cash bonus or deferred compensation plan in consideration for signing the restrictive covenants had they not done so before beginning employment with the company.
Whereas if the restrictions are embedded in a joint shareholders agreement between co-principals in the company, they can reasonably be much longer, for example five or seven or more years following departure of a shareholder from the company; since they were carefully bargained for amongst the shareholder group as equals, and the departing shareholder is likely receiving a substantial amount of money in a buyout of his or her stock upon departure from the company.
Employee Non-Competes |
Business Non-Competes |