9 Things to Consider Before Asking Employees to Sign a Non-Compete Agreement

Increasing activity in the courts shows that the use of non-compete agreements is likely on the rise. In 2012, there were 760 published U.S. court decisions involving non-competes – a 61 percent increase since 2002.

So why the increase?

Unemployed, qualified talent is getting harder and harder to find. As a result, many companies are targeting candidates who have a job but may consider a change if the right opportunity comes along.

A non-compete agreement can help prevent loss of income and protected information if a competitor were able to lure one of your employees away from your organization. Just be sure you’re aware of all the implications before you ask your employees to sign one.

Here are nine factors to think through before you decide what’s best for your business.

1. Non-compete basics

Non-compete agreements, or clauses as they’re sometimes called when part of a larger employment contract, require your employees not to work for competitors, sell to your client list or otherwise work against you typically for a year after they leave your company.

They can be drafted to protect a specific sales territory, certain clients by name or intellectual property.

2. The laws in your state

State, not federal, laws govern non-compete agreements. These laws and their interpretation in court evolve frequently, so it’s wise to first check in with your attorney to see how non-competes are usually handled in your state. Also, if you have employees in more than one state, you may need several versions of your agreement.

3. Exiting employees

When fair and reasonable, non-compete agreements let exiting employees know their boundaries when they go to work for another employer.

4. Left-behind employees

Losing a client to an exiting employee’s new company can be demoralizing to left-behind employees.

Long-term, loyal employees want to know you’re being proactive in protecting them from losing clients and competitive edge.

In Pennsylvania, a group of insurance brokers from B.G. Balmer & Company resigned on the same day in 2003 to start working for another insurance provider – taking about 20 clients along with them.

Instead of taking over the sales accounts of the departing brokers, those left behind were likely left reeling from the loss.

5. Your industry

Companies that rely on sales professionals for leads and deal with patented technologies often use non-compete agreements, so they are found in nearly every industry.

For comparison, consider researching whether your competitors require their employees to sign non-competes. Ideally, your own non-compete should include similar terms so that you remain consistent with your industry. If you were to make your non-compete much stricter than your competitors’, jobseekers may notice your stringency.

6. Fairness

Putting together a non-compete agreement that’s fair can be tough, especially when you decide to go through the trouble of drafting and implementing one. Why not make it all-encompassing?

However, unreasonable demands might make it hard to enforce your non-compete, and you may be asking for violations.

Non-competes must be fair, with reasonable limitations as to time and geographical area such that the restraint on work is not greater than necessary to protect the employer’s business interest. Non-competes shouldn’t prevent employees from making a living in the future.

7. Enforceability

People often think non-compete agreements aren’t enforceable. While that notion is inherently untrue, it does come from some valid evidence – historically, non-compete agreements have been disfavored by the courts in most states.

But with the uptick in cases involving non-competes, you’ll hear about more rulings in favor of the employer these days.

Remember the group of insurance brokers that left Balmer all at once for a competitor in 2003? In June 2013, a Pennsylvania state court judge ruled that Balmer’s employees had violated their non-compete agreement and awarded Balmer $2.4 million in compensatory damages and $4.5 million in punitive damages. It may have taken 10 years, but having a non-compete paid off for Balmer in a big, big way.

So stick to reasonable time and territory limits. These generally cannot be more restrictive than necessary to protect your business. The more specific your non-compete terms are, the easier they are to understand and enforce.

Fear of litigation alone may be enough to enforce the terms of a non-compete agreement for some employees.

8. Legal help

You should work with your attorney to draft a non-compete agreement for all relevant states and also create a plan for enforcing them in the case that you suspect a violation.

9. Your hiring process

Non-compete signing requirements should be part of your job descriptions, 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 to have the deal fall through at the end because of a surprise non-compete agreement. And know that by having a non-compete, 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 non-compete agreement when hired. They are usually excited to take the job and will likely be signing lots of other paperwork at the same time. So, when they decide to look for a new job in a couple of years, they may forget completely that they ever signed your non-compete. (Perhaps that was the case with Balmer’s departing insurance brokers.)

On the flipside, if you’re hiring and your ideal candidates say they didn’t sign a non-compete with their last employer, you really have no way of knowing that’s true without calling the previous employers yourself.

Have questions about the hiring process? Insperity Recruiting Services offers a variety of services to help you create a recruiting strategy that’s best for your business.