Using an employee noncompete agreement could help prevent your staff from going to work for a competitor.
But asking employees to sign one isn’t something you should rush into.
There are many nuances about noncompetes from their legal enforceability to employee perceptions about them that you need to carefully consider.
Here are seven factors to consider as you decide what’s best for your business.
1. Noncompete basics
Noncompete agreements, or clauses – as they’re called when part of a larger employment contract – can restrict your employees from accepting a job with one of your competitors for a specified period of time (usually a year) within a defined geographic area after they leave your company.
Employee noncompete agreements are traditionally one way business leaders have guarded important company resources, including:
- Trade secrets
- Intellectual property
- Confidential information
- Company reputation
Sometimes other provisions are used for similar reasons alongside noncompete clauses or used as alternatives:
- Nonsolicitation agreements – can prohibit former employees from soliciting your customers or employees for a specified time upon their termination of employment
- Confidentiality agreements or nondisclosure agreements – can prevent your employees from sharing specified confidential or sensitive information about your business
- Proprietary information and inventions assignment agreements (PIIAA) – can assign any inventions developed by your employees to your company and can make it possible for you to file patent applications on their behalf
2. State laws and enforceability
State, not federal, common law governs noncompete agreements, and many states have regulations that limit and affect their use.
Historically, noncompete agreements have been disfavored by the courts in most states.
They’ve also been at the center of many public policy debates, criticized for lowering competition between businesses and hurting employees’ job mobility and wage growth.
In some places, like California, noncompetes are generally unenforceable. Other states prohibit their use with low-wage earners or place restrictions on certain professions like attorneys, physicians and the financial industry.
Given this enforcement climate, it’s wise to check with your legal counsel early on to see how enforceable a noncompete would be in your location and industry.
As a general rule, noncompetes must have a reasonable duration and geographic scope to be enforceable. These limits can’t be more restrictive than necessary to protect your business. The more specific your noncompete terms are, the easier they are to understand and enforce.
3. Fairness to exiting employees
When fair and reasonable, noncompete agreements let your exiting employees know their boundaries when they go to work for another employer’s business, but they shouldn’t hinder an employee’s ability to make a living in the future.
After all, there are many legitimate reasons why employees might leave and move to a competing business:
- Is there a better opportunity for them closer to home?
- Will they make more money with the new employer?
- Did they move, and it’s now more practical to work for your competitor?
- Does the departure allow them a career progression you couldn’t offer?
4. Your industry
Companies that rely on sales professionals for leads and deal with patented technologies use noncompete agreements, so they are found in nearly every industry.
For comparison, consider researching whether your competitors require their employees to sign noncompetes.
Ideally, your own noncompete should include similar terms so that you remain consistent with your industry. If you were to make your noncompete much stricter than your competitors’, jobseekers may notice your stringency.
5. Legal counsel
You should work with your employment law firm to draft a noncompete agreement for all relevant states and also create a plan for enforcing them in the case that you suspect a violation.
An attorney can help you develop your noncompete in a way that:
- Ensures your company’s legitimate business interests are protected
- Avoids making it overly difficult for your employees to pursue their livelihood in the future
6. Recruiting and hiring optics
What does your recruiting pipeline look like? Do you ever reach out to passive candidates working for your competitors? How many of your current employees have experience with a competing business?
If your recruiting strategies and employment agreements send mixed signals to your new hires about your relationship with the competition, it can negatively affect your company culture and employment brand.
If you’re going to require new hires to sign a noncompete, this should be indicated in your job postings, or at least communicated to your candidates as soon as there’s interest on both sides.
You don’t want to create a bait-and-switch scenario or have the deal fall through at the end because of a surprise noncompete agreement. And know that by having a noncompete, you could lose a few good candidates who are unwilling to sign it.
Also realize that your employees won’t always remember that they signed a noncompete agreement when hired. They are usually excited to take the job and will likely be signing lots of other paperwork at the same time.
On the flipside, if you’re hiring and your ideal candidates say they didn’t sign a noncompete with their former employer, you really have no way of knowing that’s true without calling the previous employers yourself.
7. Alternatives to noncompetition agreements
Considering all the nuances surrounding employee noncompete agreements, you may find it best to explore other avenues of protecting your trade secrets, customer goodwill and other proprietary information.
Taking into account the nature of your industry and business model (and with the help of your attorney), here are some final questions to work through:
- Do we really need a noncompete agreement to protect our interests?
- For which positions and employees is this truly important?
- Would a nonsolicitation clause, confidentiality clause, PIIAA or some combination protect us sufficiently and be more enforceable?
You may also consider working with your IT department to help you protect important data in a way that works alongside these agreements.
For example, can you set up your IT system to flag certain types of downloads involving proprietary information? That way if an employee leaves and there have been suspicious information downloads, you can have a conversation with that person before any potential issues.
A company employees don’t want to leave
And don’t forget that when you create a work environment that encourages your employees to stay with you, you proactively reduce the necessity of measures like using employee noncompete agreements.
It takes time and commitment, but investing in your people and culture can give your business the competitive advantage it needs to succeed and grow, no matter what you’re up against.
To learn more about keeping your employees happy and on your team, download our free magazine: The Insperity guide to employee retention.