Are Your Employment Contracts Working for You?

In the mid-1800s retail magnate Marshall Field opined that “goodwill is the one and only asset that competition cannot undersell or destroy.”

Evidently, the business world has changed dramatically.

An efficient, inexpensive and effective tool to protect your company’s interests from the potentially devastating actions of former employees or business owners is a carefully drafted contract that includes reasonable non-disclosure, non-solicitation and non-competition provisions, as well as a non-disparagement provision.

A company’s need to protect its business by limiting a former employee’s new employment opportunities conflicts with an individual’s freedom of movement in the economy. Thus, courts will only enforce restrictive covenants that protect legitimate business interests and that are narrowly drafted to prevent unfair competition.

What then are the considerations in drafting an employment agreement? What are your legitimate business interests? What steps should a company take following departure of an employee to maximize the likelihood that restrictive covenants will be enforced?
Define Your Business Interests

Because courts will only restrict unfair competition, contract provisions that provide a blanket prohibition against all competition are not enforceable. In order to assure that the restrictive covenants in your agreements are enforceable, you must start by defining the legitimate business interests for your company. Under Massachusetts law for example, legitimate business interests include goodwill, trade secrets and confidential information. Under some state’s laws, you may even have a business interest where you provide your employees with extraordinary or highly specialized training.

Equally important is defining the scope of the business from which you will seek to ban your former employee. A covenant that aims to protect you from all possible competitive activity is unenforceable. You should analyze an employee’s responsibilities to determine the field and activities in which the employee is actually engaged and clearly define this area within the agreement.

The goal should be a non-competition provision which seeks to protect you from probable threats (i.e., targets your product, sales area, clients and how competitors will compete) and whose duration and geographic scope is tailored to the position, experience and value of the former employee. Keep in mind that in the context of the sale of a business a broader restrictive covenant is more likely to be upheld.

Undefined and ambiguous phrases in restrictive agreements such as “territories” or “activities” are often interpreted against the employer, or worse, are found unenforceable. A staffing company, for example, should not state broadly that the ex-employee may not compete in the “business of the company,” but more specifically should say the ex-employee may not compete in, for example, “the placement of temporary or permanent professionals in the finance and accounting field.” Clarity will not only avoid unenforceability but will also satisfy a court that the former employee understood the limitations in the agreement.
Address All Questionable Conduct

Competition is not the only conduct that you should protect against. An employee who disparages your company, discloses confidential information, or solicits key business contacts or employees can be just as destructive. Thus, restrictive covenants that target this conduct are equally important.

An effective non-disclosure provision contains a thorough definition of the type of confidential information to which an employee is exposed and includes an acknowledgement that disclosure of this information would be so harmful that money damages would be insufficient. A non-solicitation provision should define the clients, key business contacts and internal employees from which the former employee must stay-away and should clearly delineate the duration of this provision.

Clauses providing for reimbursement of training cost and prohibiting disparagement provide the company with additional protection. Finally, for added value to your business, you should consider expressly making the agreement assignable by the company.
Protect Your Agreements

Restrictive covenants should be included in all employee contracts, not just those of sales people. Your company’s controller, head of human resources and information technology director have as much if not more ability to wreak havoc on your business than a star salesperson.

To be enforceable the agreement must be supported by consideration. In some states, such as Massachusetts, continued employment of an at-will employee will provide sufficient consideration. An agreement executed at the inception of the employment relationship is also commonly found to have sufficient consideration.

Even after drafting a solid employment agreement, companies are still at risk if they don’t ensure that the agreements are actually signed, safeguarded and kept current. The original agreement should be kept in a secure place with the individual’s original employment file. Any subsequent agreements signed by the employee should expressly acknowledge the existence of pre-existing agreements and should address their viability. Material changes in an employee’s position should be accompanied by execution of a new agreement.

In seeking to enforce a non-disclosure agreement, you will have to demonstrate that the company truly treated its business data as “confidential.” This means your confidential information should actually be protected. Simple protections include issuing passwords to protect databases, limiting administrative passwords, maintaining locked offices after hours and limiting the ability of individuals to print information from their desktops or at least tracking significant print jobs.
Police Your Agreements

Execution of the restrictive agreement does not guarantee that it will serve to protect the business. Vigilance is crucial not only in protecting a company’s assets but also in the ultimate enforcement of the agreement.

A departing employee should be reminded of his obligations to the company and should be given a copy of applicable agreements. Upon hearing that an employee will be joining a competitor, you should immediately check for any unusual conduct, including unusual e-mail traffic and print jobs, and take action.

A company should prevent the perception, either in-house or within the industry, that it is unwilling to enforce its restrictive agreements. Where an ex-employee is found to be competing, soliciting employees or clients or disclosing information, the company’s movement should be swift.
Do Unto Others….

The best position for the company to be in when it attempts to enforce its restrictive covenants is for it to have respected its competitors’ agreements. Having your new employees sign an acknowledgement that they are not bound by any agreement that restricts their ability to work for you is one way to demonstrate that you are acting in good faith.

The company should also have an institutional memory regarding the positions taken in any lawsuits in which it has been involved. Courts will be particularly suspicious of a company that changes position depending on its interests in a lawsuit and may choose to deny injunctive relief under egregious circumstances.

William Knudson Jr., early chairman of the Ford Motor Company, is credited with saying “In business, the competition will bite you if you keep running, if you stand still, they will swallow you.” The hope is that with an enforceable restrictive covenant in place, a company that keeps running will not even get bit.