How to Avoid Competition from Employees The Independent Quarterly, Feb. 15, 1998 You've spent the better part of the last several years establishing a new business. You've worked tirelessly for little compensation, and your efforts are now just beginning to pay off. What you may not know, or might not even have considered, is that your trusted, faithful employee is sick and tired of working for you. This employee believes that if it were not for him, you would still be struggling. He is positive that if he were running this business, he could be much more creative, cost-conscious, hard-working, sensitive to the customer, and profitable. Most importantly, he would be his own boss. You are shocked when he turns in his resignation without any explanation. However, the explanation becomes very clear when he opens up a competing business right down the same block, the very next week. A few days after that all your customers receive solicitations from him in the mail. Next, several of your trusted employees go to work for him, and soon you find yourself at a competitive disadvantage. Consider a Noncompete Agreement All of this could have been prevented by good legal planning before you begin hiring. First, and most importantly, you must require each management employee and other especially valuable employees to execute a well-drafted non-competition agreement as a condition of employment. A non-competition agreement can be included as part of a contract of employment or can consist of a separate written contract. It is imperative that this agreement be executed at the time an employee is hired because a later agreement can be found to be without what is known as "adequate consideration." Adequate consideration means mutual benefit for both parties to a contract. If you require employees to sign a non-compete agreement after they are already part of your company, they are obligating themselves without getting anything in return. That type of contract is illegal. A non-competition agreement is designed to prohibit an employee, after his employment is terminated, from establishing a competing business, accepting employment from a competing business, and soliciting your existing customers. Such an agreement is generally valid and enforceable if it is supported by adequate consideration and is reasonable both as to area and time. For example, contracts prohibiting competition for a period of one to three years from the date of termination in a geographical area where you have always conducted a substantial amount of business, will usually be upheld. Additionally, the agreement will only be upheld if it is no broader than necessary to protect the employer's business. If you have several trusted employees who have never executed a non-competition agreement, there are steps that may be taken to minimize the possibility that your employee will strike out on his own in direct competition with you. First, if he is an employee "at will," insist that he sign a non-competition agreement as a condition of continued employment. As long as you have no legal obligation, by contract or otherwise, to retain him whether or not he signs such an agreement, it is likely that the agreement will be enforced. What if the Employee Won't Sign If the employee refuses to sign such an agreement (which may be a sign of problems to come), and if you are a corporation, you may wish to elect the employee an officer, particularly if he is already hold a position of trust and confidence within your company. If you are not a corporation, place the employee in a position similar to that of an officer of a corporation. This places the employee in the legal position of a fiduciary, through which he will obtain confidential proprietary information. As an officer, he may not profit at the expense of the company, and he may not setup a competing enterprise. By becoming a fiduciary to the company, the employee must manage the affairs and property of the company for its benefit. He cannot allow his official conduct to be swayed by his private interest or welfare. As a fiduciary he cannot plan, while still an employee, to leave the company and establish a competing enterprise. He may not, while in your employ, conspire with other employees to terminate their employment to become employed by him. Even after he resigns, although he may then compete and carry with him his personal experience, enterprise and knowledge, he may not use prior fiducial confidences to profit at your expense. Sound Legal Planning a Must The penalty of not taking the above steps is heavy. Your employee has left you for a strong competing venture. Even worse, his leaving has weakened your existing operation. At this point, your choices are limited. The most unpleasant choice will be to do nothing. The other option is to file a lawsuit against your former employee. However, in many respects this, too, will prove most unsatisfactory regardless of whether you are victorious. Litigation is very expensive and will require much more of your time than you have to devote to it. It will drag on for many months or even years. You might lose, but even if you win your former employee may not have sufficient assets with which to satisfy a judgment. Your attorney can assist you in the planning necessary to reduce the likelihood that any of the problems set out above will occur. Any expense associated with this planning and drafting will be far outweighed by the savings associated with not having problems which can arise without the planning. Wesley A. Gersh is an attorney with Taustine, Post, Sotsky, Berman, Fineman & Kohn, Lousiville, Kentucky. Back to Non-Compete Agreements