Noncompetes: This isn’t your father’s business environment anymore
"In this economy" is a refrain we hear constantly these days. But a down economy means different things to different people in different business positions. Business owners that are fortunate enough to be weathering the storm intelligently have realized that it is a buyer's market for young, educated employees. Eager to protect what they have built, more and more local businesses are seeking to have these employees sign a noncompetition agreement (also referred to as a "noncompete" or "covenant not to compete").
Consider these examples:
Case No. 1: A young college graduate can't find a "real job," so right out of college she takes an ultra-risky job, for next to nothing in salary, working for an entrepreneur in the manufacturing field. She works closely with her employer, an the company is a huge success in a period of five years, growing to several divisions and numerous employees. She is now the COO, running the majority of the divisions. While working her typical 12-hour day she discovers a noncompetition agreement with her name on it sitting on the printer she shares with her employer. How should she react?
Case No. 2: A young hairstylist switches over to a prestigious local hair salon. Eager to begin her new employment she signs a noncompete that, if she leaves the new salon, would prevent her from servicing even the clients she brought to the new salon for a period of one year in the Traverse City limits. Only a few months later she has a disagreement with her employer and wants to quit. Her employer tells her that she "can't quit" because she's signed the noncompete. What should she do?
Case No. 3: A young doctor is growing a vibrant patient base. He is paid based on the practice's performance instead of his own. The practice is not presently as successful as the young doctor. An older specialist is brought into the practice to help and is to be paid a large, guaranteed salary but is required to sign a noncompete. To make the specialist feel comfortable signing the noncompete, all of the physicians there are required to sign. Should the young doctor sign?
First, know this: Noncompetes are enforceable in Michigan if they are "reasonable" in duration and geographic scope. "Reasonableness" is different for each profession. A reasonable geographic scope for a hairstylist may be the Traverse City city limits. A reasonable geographic scope for a medical specialist may be numerous counties in northern Michigan, or even the state of Michigan itself. In the case of the manufacturer, the proposed noncompete covered all of North America.
Nevertheless, in all three scenarios – each of them real – the employees chose to leave their jobs. And in all three scenarios, the same result occurred: 1) Having left, all of the employees are presently happier for having done so; and 2) All of the employers' objectives in using the noncompetes (to protect their trade practices, to retain good employees by restricting when they could leave and where they could go, and to convince an important lateral hire to sign on – thus building the practice) were not met.
So what do employees need to know when they are presented with a noncompete?
First, if you don't sign the agreement, you might find yourself out of the job. But don't ever "just sign it." Take stock of your current situation. Do you want to continue with that employer or even in that field? Are there other opportunities locally? Are you ready to start your own business? Do you really "need" this job so much so that you are willing to risk future opportunities?
If you decide to sign the noncompete, negotiate the terms. Try to reduce the geographic scope or duration. Ask for a "severance clause" or a "buy out" if you are let go or fired. Don't agree to release your employer from their wrongdoing or agree to pay your employer's attorneys' fees if they sue you to enforce the noncompete. If all else fails, ask for a signing bonus or other compensation to sign the noncompete.
If you have already signed a noncompete, keep track of whether your employer is enforcing other employees' noncompetes when they leave. Carefully review the noncompete with an attorney for any "outs." If you choose to leave, ask for a release of the noncompete from your employer. If you seek other employment, be sure to let prospective employers know that you are subject to a noncompete.
What do employers need to know before presenting an employee
with a noncompete?
First, if the employee is important enough to be asked to sign a noncompete, they are important enough to be compensated to sign it. Consider employment agreements with key personnel to solidify those employees' loyalty and hard work.
Communication is critical. Be prepared to articulate what business interests you are trying to protect and why that will benefit the company and, in turn, the company's employees. Involve your attorney to explain the reasons for such an agreement and to take some heat for implementing the noncompete.
Negotiate. The "take it or leave it" approach rarely works and, at minimum, will have a horrible effect on employee morale.
"In this economy" (see, you read it again), we should all consider ourselves lucky to have employment. But oftentimes the presentation of a noncompete to a motivated, educated employee will not secure that employee's loyalty and continued employment and, instead, will be the spark needed for the "employee" to make the leap to "entrepreneur."
Worden is the founder of 360 Law – a law practice providing perspective on matters that matter – in Traverse City. Worden specializes in litigation, business and estate planning. 231.932.0360, firstname.lastname@example.org.