Imposing Restraints on Top Employees

How a 15 works

How can you stop one of the rising stars in your company from leaving for greener pastures? While you cannot permanently block a move, one technique employers often rely on is to use a noncompete agreement. Essentially, the employee may be barred from revealing trade secrets or pilfering clients for a competitor after departing the company. But this protection is not ironclad: An employer may still have to go to court to protect its interests.

Despite the limitations, the popularity of noncompete agreements continues to rise. According to the U.S. Treasury Department, about 30 million Americans are currently subject to certain restrictions, and this number is expected to grow.

Background: An employer may require a signed noncompete agreement as a condition of employment or upon “separation from service” (e.g., quitting, being fired or retiring). For instance, signing the agreement may entitle a departing employee to receive a severance package. The noncompete will generally limit employment activities in the same field for a designated period of time.

However, the agreement cannot be overly restrictive and must be carefully worded. In other words, you cannot bar an ex-employee from pursuing his or her livelihood.

Typically, an individual may be allowed to join a competing firm but will be prohibited from contacting former clients or customers. An experienced attorney should approve the language in the agreement.

The enforceability of a noncompete, or a clause in a more substantive employment contract, generally depends on whether the restrictions are “reasonable.” When assessing the reasonableness of a noncompete agreement, the courts will weigh the following factors:

  • The length of time the agreement remains in force
  • The scope of the geographic area restricting the employee
  • The reason for the employee’s departure
  • Whether the agreement restricts activities not in competition with the company
  • Whether the agreement prevents the employee from working in his or her chosen field

A court’s decision on violation of a noncompete agreement usually depends on the extent of the employee’s knowledge and his or her actions. For example, an employee may claim that he or she has no knowledge of trade secrets or other confidential information, but only “general knowledge” of the business. In that case, the burden of proof is on the company to establish that the knowledge includes trade secrets or is otherwise confidential.

If a court finds that the employee has only general knowledge or the agreement is designed simply to hinder the competition, no legitimate business interest is being protected. As a result, the noncompete agreement is unlikely to be enforceable.

In summary: As you can see, it is important to handle noncompete agreements with care and diligence. Obtain expert professional advice with respect to your company’s situation.

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