Non-Competes Are Essential to Retaining Your Best Employees

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In the face of a growing economy and new technologies being introduced on a daily basis a non-compete has become an essential part of the technology sector. In those states that permit restrictive covenants, non-competes are essential to maintain a competitive advantage and helps to discourage employee espionage. In competitive industries especially in sales environments or industries where the information is extremely valuable, a non-compete is a best defense against your competition when your employee leaves an organization.

Employer Non Competes Are an Employee Retention Tool 

I was reminded of the importance of employer non-competes for companies to use as an intellectual property and company protection tool after reading Dan Schawbel’s article on his opinion that non-competes are on the decline and should be illegal. As an organizational manager, I can speak from experience that our greatest fear is to loose our star employee.  Yet, even worse is than loosing your best sales person only to have your customers targeted by your former employee lured away having your ex-employee know every play in your business play book.  This is why non-competes are essential to protecting the profitability of your organization, not necessarily the livelihood of your employee.

One of the most well known cases involving intellectual property was Mattel vs. Bratz where developer, Carter Bryant, was order to pay damages to Mattel for trying to create the Bratz brand while still working for their company. Mattel won and order the creator to pay back damages worth hundreds of millions. While non-compete clauses might seem harsh in the eyes of a job seeker, it’s an essential piece of protection for any company in a highly competitive industry. Trade secrets, top talent, and protection from competitors are important reasons companies are now leveraging the use of a non-compete clause in any standard employment contract. When an employee works at a company and develops an idea, they don’t own the rights to that idea unless you are Mark Zuckerberg and then you settle in court.

There are countless cases involving social media and who owns LinkedIn connections and Twitter followers.  These are all somehow tied into who owns what when an employee leaves. If you are an employer and are looking for a guaranteed media frenzy, sue your employees for the right to own their Twitter followers after they leave. It won’t be positive but all press is good press, right?

Having a solid legal foundation in place when it comes to your employee protects but doesn’t guarantee the employer.  It also sends a message to your competition, clients, and candidates that you mean business.

  • Protection of Trade Secrets. Any type of valuable business information that you are trying to keep a secret from competitors is subject to trade secret protection. Maybe you are wondering if there is a difference between non competes and protecting your trade secrets. Putting safeguards in place not only protects this information, but it shows interested parties that you’ve attempted to keep your idea an actual secret.  A widely recognized precaution includes requiring employees to agree not to use or disclose confidential information. Having non-compete clauses in your employment contract is taking an extra step in keeping your company trade secrets, a secret. Plus, there’s this little thing called an invention assignment clause when it comes to work for hires.  Tricky, complicated stuff. That’s why I call my favorite lawyer for the skinny. He steers me in the best direction to chat with specific attorneys who specialize in the complicated world of this kind of thing.
  • Enhance the Value of Your Company. Enhance the Value of Your Company. Like most startups in Silicon Valley, you want to be sold or acquired at some point in your company’s lifecycle. Owners and significant investor-employees (think stock options) can be prohibited from competing against the new owner through non-competes. California Business and Professions Code Section 16600 prohibits restrictions on an employee’s right to compete unless the restriction is tied to the sale of a business or the employee is selling a significant amount of stock back to the company as he or she walks out the door. Protecting the value of your company by requiring these employees to sign restrictive non-complete causes is more important then ever. When in connection with the sale of a business because the purchaser someone purchases a business they want wants to be assured that they are getting what they paid for. If they believe that key assets have been shared with competitors the value of your business declines quickly. Whenever you start a business, have owners, partners or key investor employees employees sign non-compete clauses because afterthought covenants are a legal battle of their own.
  • Deter Competitors from Hiring Employees. A non-compete clause won’t fully protect your competitors from hiring your employees, but having access to confidential information or customer relationships is another story. Sending a message to your competitors that you are prepared to protect these interests is a nice side effect to the changing competitor culture.

Protecting Your Work Assets Like Marissa Mayer

A non-compete clause or other assignment of inventions clause doesn’t have to seem like an evil thing that companies do to end all outside engagement. Then again, we know exactly how the press and Yahoo employees feel about the recent HR decree from CEO Marissa Mayer ending telework. A non-compete is not an employee retention tool.  An employee non compete agreement is a company protection document and mechanism pure and simple just like signing your employee handbook acknowledgement. Non-competes do not guarantee that if used in good faith an employee will stay loyal to a company and not destroy the company from the inside out.  A policy, document or corporate decree doesn’t change the company culture, bad work environment or shoddy way of doing things. There are many benefits to the company and even to the job seeker when it comes to non competes. There are also perils too so check your state requirements when it comes to non competes. Don’t look at a non-compete as a contract to hold back your employees, but to give them the freedom to develop and excel at the products offered by your own company. Protecting your assets is just good business sense especially when your employees know what those boundaries are. Now, back to working in my virtual home office.

What’s your experience with Non Competes?  Have you had a non compete go bad or a work story you care to share? As a business leader, have you ever had a situation when you had to involve legal or go to court?  

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Comments

  1. Non compete agreements are tools that only defend the company’s interests, and only impedes with the employees’ careers. I agree, when you sign a non-disclosure agreement, the company allegedly gives you a substantial raise to compensate, but that is not always the case. The laws should be more strict when a company decides to, all of a sudden, impose this sort of agreements.

    Reply
  2. With a non-compete, an employer walks a fine line between trying to protect their business and allowing a employee to work in their field. In some areas, mergers have significantly shrunk the job market and there are not a lot of jobs out there. Non-competes should be for top tier execs and not the little guys!

    Joan Potashner |
    Reply
    • Joan,

      I’ve had entry level sales pros sign non competes. The NC kept them from taking customers if they left to a competitor but only for a year. They could still go work for a competitor, but we would hear from word of mouth that they were there and then I would have the attorney send them a nice threatening note. Generally, things stopped there for the entry level positions. NC’s are used in all types of positions and there are different laws based on the state where you sign.

      Thanks for the comment.

      JMM

      Reply
  3. In my experience a non-compete is strictly one sided and in favor of the employer. In the current challenging economic environment the employer has an overbearing advantage. A potential employee, who has been unemployed for an extended period of time, has few choices with job offers, and most likely will accept a non-compete, even if it’s not to their advantage. In this anecdote, an employee with a several year non-compete is terminated after a short tenure, leaving him/her with no opportunity to be reemployed in that market. The employer, as they now have the knowledge of the employee’s created contacts, established business and business pipeline, is the sole beneficiary of the terminated relationship. So, where’s the equity?

    Anonymous |
    Reply
  4. I could not disagree more. I think NDAs are important (you can’t take or share our property with others), but broad noncompetes (you can’t use your own brain and hands to compete with us) manage to be pointless AND undermine innovation and employee engagement at the same time.

    Reply
    • Mary Ellen,

      Of course and those if challenged in court probably won’t stand. Except that most employees or former employees won’t go to court because it’s expensive and that’s what employers want.

      I think NDA’s are important especially in the business you and I are in but those are different from NC’s.

      Thanks for the comment.

      JMM

      Reply
  5. If you’re in a business that is either pure commodity, or highly, highly trade secret oriented, there MIGHT be an argument for non-competes. Beyond that they are entirely one sided and I would recommend to anyone to walk away from the job rather than sign one of these agreements.

    The industry that I work in. You have companies that produce products that go to many Fortune 500 companies. For anyone signing one of these agreements, if enforced, you are precluded from working in the industry for a year. You might get a job with a company outside of your area of expertise, but you would go in at a novice level and novice pay.

    If a company needs you that much, then they should be willing to pay you for the year that you’re out of work.

    Reply
  6. There are so many ways around non-competes and non-solicits. It’s absurd for someone to attempt to stop another person from working. Last year a former sales colleague of mine left our company to work for a competitor. Because the new company was already also doing business with most of his old clients, the non-solicit was void, and he could freely work with his clients.

    Anonymous |
    Reply
  7. My son had a 2 year NC; he was working for a large private firm, and his direct super was the owner’s son. The two did not get along, guess who had to leave? He was told that the company was cutting back on sales staff, but less than two weeks later the company was advertising to hire a replacement salesman.
    The company’s actions should have made the NC void.

    Reply
  8. I respectfully disagree. Non-competes are about trying to prevent an employee from working for a competitor. They do nothing to actually “retain” an employee. If anything, they foster a feeling of distrust. If you want to retain your employees, treat them right rather than accuse them of something before the fact.

    Grant Epstein |
    Reply

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