Q: Why should our company have a noncompete agreement with employees? Ifsuch a policy is necessary, what should it look like? Who should be covered, and what should the agreementcontain?

A: Noncompete and nondisclosure agreements are popular tools used by manycompanies to retain knowledge and discourage the departure of employees. For many start-upand technology-based firms, the secrets these agreements help protect are among the mostvaluable assets they have.

Information that can be protected by an agreement include trade secrets, employee data,customer lists, proprietary processes, and corporate business plans. In the absence ofnoncompete or nondisclosure agreements, departing employees are basically free to competeagainst their former employer. Although some states do have laws that prohibit the disclosure ofcompany secrets, enforcement and legal recourse can be challenging without an agreement.

A company should have a legitimate reason to require an agreement. Restricting an employee'sability to compete, earn a livelihood, or apply the skills and knowledge acquired during the courseof employment without substantiation is unreasonable.

Enforce Internal Protections

The company should make an active internal effort to protect secret data. Companies that are cavalierand inconsistent in their approach to confidentiality on-site are unwise to require agreements toprotect secrecy from those departing the organization.

Determine the willingness of the company to litigate. Is the document a formality of employment or arealistic enforceable contract?

Restrictive agreements can be classified in three categories:

  • Noncompete agreements prohibit an employee from working for, or as, a competitor of theemployer. The logic of this agreement is that it prevents employees from using acquired information forthe benefit of a competitor. It is best used when the employee will have access to sensitive information.
  • Nonsolicitation agreements typically prevent former employees from soliciting, contracting, ortransacting business with the employer's existing customers. It is used to prevent employees who areleaving from taking the clients, employees, and vendors of the former employer with them upondeparture.
  • Nondisclosure agreements prevent employees from disclosing their former employer's trade secrets,proprietary information, and/or confidential business information, or disclosing this information to thirdparties.

Companies should be specific as to what is being protected. Some examples include keepinginformation confidential, trying to prevent increased competition, barring former employees fromsoliciting its clients, insulating current employees from raiding, or restricting trade partners.

Even the most restrictive agreements will have limitations on how long and where the restrictions areappropriate. Enforceability is questionable if the scope is overly broad or too long.

Technology Extends Boundaries

Don't forget with advances in technology, virtual employment may extend beyond the brick boundariesand geography of traditional arrangements. Focus on technology innovation when structuring the scopeof noncompete documents.

Consider the penalties for violating the agreement. Penalties can include injunctions, damages, anddefense costs.

Discuss limitations upon who within the company should be covered by the agreement. Consultants,contractors, and freelancers may also have access to sensitive information. Employees are not equallyvulnerable to competitive secrets or new products and should be restricted only as a business necessity.

Equally important, especially in the case of nondisclosure agreements, is what is excluded fromprotection by the agreement. Whatever is included should be construed as critical to the continuedsuccess of the company.

Recommendations for Success
  • Have the employee sign the agreement as a condition of employment, before commencement of employment.
  • Limit only behaviors that are conclusively necessary for restriction.
  • Take policy violations seriously. Consistently enforce punishment for policy violations.
  • Consult an attorney to draft an agreement appropriate for your organization.
  • Be sure that new incoming employees are not restricted by previously signed agreements.

Robert Hoffman is principal and CEO of HRAdvice.com; 877-854-0469.

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