Losing clients to a former employee starting a competing business is a common concern. While frustrating, legal recourse is limited without a non-compete agreement signed during their employment. Consult your attorney to explore other legal avenues, such as misuse of stolen trade secrets, but generally, preventing a former employee from soliciting your customers requires a prior agreement. Non-compete agreements are increasingly popular as businesses seek to protect themselves from competition initiated by former employees. Many employers now require key personnel to sign these agreements as a condition of employment, though employees may view them as career obstacles.
A non-compete agreement is a formal contract where employees agree not to use company information or contacts in a competitive setting. This prevents them from leveraging knowledge gained during their employment for a competitor or to start their own rival business. While unpopular with employees, these agreements allow employers to retain key talent and safeguard proprietary information. However, avoid overuse; not every employee needs one. If an employee lacks access to sensitive data, customer information, or isn’t crucial to your business’s success, a non-compete is unnecessary. A janitor, for example, poses little competitive threat compared to a sales manager who could significantly damage your business by joining a competitor.
Consider requiring non-competes for the following employees (roles may vary by business):
* Those involved in research or product development.
* Those involved in design, fabrication, engineering, and manufacturing.
* Employees who service your company’s products.
* Sales and service employees with regular customer contact or access to sensitive customer data.
* Employees with access to sensitive business information or trade secrets.
* Critically, those with sufficient knowledge to start a competing business.
While generally beneficial, non-compete agreements can be difficult to enforce and may be unenforceable in some states. Many courts view them as overly restrictive on an employee’s ability to earn a living. For example, California largely restricts enforcement to the sale of a business, not employment. Alabama enforces them in sales of business and employment contexts, but only with a valid interest to protect.
Some states require the agreement be signed at the start of employment; agreements signed later require a promotion, raise, or increased responsibility for enforcement. Enforceable agreements must be reasonable in time, geography, and scope. Time restrictions typically range from one to three years. Geographic restrictions must be limited to your business’s operating area. The scope must restrict specific actions without preventing the employee from working in the industry in a non-competitive role.
Notably, non-compete agreements are often unenforceable against certain professionals like doctors, CPAs, and lawyers.
If you’re already facing this situation, consult your attorney for possible legal grounds and inform your customers. Explain the situation calmly, avoiding negativity about the former employee. Reaffirm your relationship, emphasize the value you place on their business, remind them of your track record and service level, and ask how you can ensure their continued business.