Skip to Main Content
by Robert Hoffman | March 31, 2009

Share

QUESTION: Why should our company have non-competition agreements with employees? If necessary, what would the policy look like; Who should be covered, what should the agreement contain?

ANSWER: Non-competition and non-disclosure agreements are popular tools used by many companies to retain knowledge and discourage the departure of employees. For many start-up and technology-based firms, the secrets these agreements help protect are among the most valuable assets they have.

Information that can be protected by an agreement include: trade secrets, employee data, customer lists, proprietary processes and corporate business plans. In the absence of non-compete or non-disclosure agreements, departing employees are basically free to compete against their former employer. Although some states do have laws that prohibit the disclosure of company secrets, enforcement and legal recourse can be challenging without an agreement.

A company should have a legitimate reason to require an agreement. Restricting an employee's ability to compete, earn a livelihood, or apply the skills and knowledge acquired during the course of employment without substantiation is unreasonable.

Enforce Internal Protections

The company should take an active internal effort to protect secret data. Companies that are cavalier and inconsistent in their approach to confidentiality on-premises are unwise to require agreements to protect secrecy from those departing the organization.

Determine the willingness of the company to litigate. Is the document a formality of employment or a realistic enforceable contract?

Restrictive agreements can be classified in three categories:

~Non-competition agreements prohibit an employee from working for, or as, a competitor of the employer. The logic of this agreement is that it prevents employees from using acquired information for the benefit of a competitor. It is best used when the employee will have access to sensitive information.

Non-solicitation agreements typically prevent former employees from soliciting, contracting or transacting business with the employer's existing customers. It is used to prevent employees who are leaving from taking the clients, employees and vendors of the former employer with them upon departure.

Non-disclosure agreements prevent employees from disclosing their former employer's trade secrets, proprietary information and/or confidential business information, or disclosing this information to third parties.

Companies should be specific as to what is being protected. Some examples include: keeping information confidential, trying to prevent increased competition, barring former employees from soliciting its clients, insulating current employees from raiding, or restricting trade partners.

Even the most restrictive agreements will have limitations on how long and where the restrictions are appropriate. Enforceability is questionable if the scope is overly broad or too long.

Technology Extends Boundaries

Don't forget with advances in technology, virtual employment may extend beyond the brick boundaries and geography of traditional arrangements. Focus on technology innovation when structuring the scope of non-compete documents.

~Consider the penalties for violating the agreement. Penalties can include injunctions, damages and defense costs.

Discuss limitations upon who within the company should be covered by the agreement. Consultants, contractors and freelancers may also have access to sensitive information. Employees are not equally vulnerable to competitive secrets or new products and should be restricted only if a business necessity.

Equally important, especially in the case of non-disclosure agreements, is what is excluded from protection by the agreement. Whatever is included should be construed as critical to the continued success of the company.

Recommendations for success:

  • Have the employee sign the agreement as a condition of employment, before commencement of employment;
  • Limit only behaviors that are conclusively necessary for restriction;
  • Take policy violations seriously. Consistently enforce punishment for policy violations;
  • Consult an attorney to draft an agreement appropriate for your organization; and
  • Be sure new incoming employees are not restricted by previously signed agreements.
  • Robert Hoffman is principal/CEO of HRAdvice.com. Additional information is available at www.hradvice.com or (877) 854-0469.

Share

Filed Under: Workplace Issues
Newsletter
Subscribe to the Vault
Newsletter

Be the first to read new articles and get updates from the Vault team.