Savvy business owners realize the value of key employees. The savviest business owners consider the execution of a strong non-compete agreement with key employees to avoid costly fallout when key employees leave the business.
The loss of client lists, pricing models, customer relationships, and business goodwill—along with the loss of key employees themselves—could prove to be damaging and costly to a business. Non-compete agreements are vital instruments for businesses to protect against such losses, and are becoming more common in technology, medicine, and service-oriented industries, among other fields.
Consider a few of the many issues that should—or must—be addressed in order to create a legally enforceable and workable non-compete agreement with an employee:
Legal Requirements. State statutes and case law vary as to how broad or narrow non-compete agreements will be enforced. In Oregon, for example, non-compete agreements will only be enforced if:
The employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a noncompetition agreement is required as a condition of employment, or the noncompetition agreement is entered into upon a subsequent bona fide advancement of the employee by the employer;
The employee is an individual engaged in administrative, executive, or professional work who performs predominantly intellectual, managerial or creative tasks, exercises discretion and independent judgment, and is paid on a salary basis;
The employer has a “protectable interest,” which includes but is not limited to when an employee has access to trade secrets, or access to competitively sensitive confidential business information or professional information; and
The total amount of the employee’s annual gross salary and commissions, calculated on an annual basis, at the time of the employee’s termination exceeds the median family income for a four-person family, as determined by the United States Census Bureau. The annual gross salary and commissions threshold in 2013 was $67,315.
Case law also contains requirements regarding the “reasonableness of time and geographic restrictions,” among other requirements. While a full discussion of such requirements are beyond the scope of this article, suffice it to say that a well-crafted, enforceable non-compete agreement could save a costly legal endeavor in the long run.
Practical Considerations. Which categories of “key employees” will be required to sign non-compete agreements? If a prospective employee refuses to sign a non-compete agreement, should you proceed with the employment relationship anyway? In the long run, given your employer-employee relationship, would non-compete agreements suppress motivation or creativity? Is a non-compete agreement practical or advisable given your particular business model or industry? These are all questions that should be vetted prior to consideration of crafting and executing non-compete agreements.
Execution of non-compete agreements—and litigation over non-compete agreements—has increased substantially over the last decade. Given the legal and practical issues that abound when an employer considers a non-compete agreement with a key employee, the advice of a trusted adviser is critical to enforceability of the instrument, and making informed decisions for important relationships with key employees.