Are Employees Walking Away with Your Business?
Protecting your business assets using noncompete, confidentiality, and separation agreements
Two employees of a hair salon walked out and set up shop several blocks away, taking the majority of their clients with them. This could be a devastating loss to the salon, unless the owner took steps to protect her business.
The hair salon is a common example of a competitive industry that needs to protect its business assets — in this case, its client list.
Protecting Your Business Assets
Hair and other competitive industries, such as healthcare, software, sales, and manufacturing, have their fair share of risk when it comes to employees who have access to business assets.
Proprietary information, such as trade secrets, client lists, marketing plans, sales figures, supplier lists, technical data, formulas, and software, are often what sets one business apart from its competition.
Consider the business impact if an employee takes client records, contacts those customers, and undercuts your price. Or what if an employee takes a job with a competitor and reaches back to take your other employees with them?
These things happen all the time — people leave businesses, start their own, sign on with the competition, etc. So, how do you prevent employees from interfering with your business relationships when they leave?
Noncompete and confidentiality agreements are very useful tools in protecting your business from these risks. In the hair salon example, a noncompete agreement, limiting employees from doing business within a 10-mile radius within the first year of leaving the business, could provide adequate terms to protect the business and give the owner grounds for legal action.
A noncompete agreement is used to protect business assets and prevent employees from sharing proprietary information with competitors or opening their own shop or business.
“The agreement must be reasonable in time, geographic scope, and content,” says attorney Peggy Morcom with Buzgon Davis Law Offices in Lebanon.
• Time – How long after the employee leaves your business the agreement is effective
• Geographic scope – Actual distance from the business location (e.g., 5, 10, 15 miles) or an entire region (e.g., mid-Atlantic)
• Content – Specific terms of the agreement
“You can’t prevent people from leaving, but you can, for example, keep a person from soliciting your employees for a specific period of time by creating terms within the agreement that provide they (former employees) can’t solicit them to join them at another business,” Morcom explains.
A noncompete agreement is generally issued to an employee at the time of hire and is a contract. If not done at time of hire, it is still possible to present a noncompete agreement.
“Regardless of length of time, two months after hire or a year later, the employer must offer some other consideration (some type of compensation, e.g., financial payment, pay increase, vacation time, etc.) in exchange to create a valid contract,” says Morcom.
Not all employees may be required to sign a noncompete agreement. It depends what the employer is trying to protect.
“Working in the software industry, employees who undergo a lot of training for a position, developing a specific product; positions that are difficult to fill (e.g., rare skill sets); and healthcare, such as home health aides, are some areas where noncompete agreements are prevalent,” Morcom explains.
“The workforce of today is transient compared to 20 years ago. Employees are often alone with clients or customers or often removed from direct oversight by the employer. It is the goal of the business to protect its interests, and a well-crafted noncompete agreement is an excellent tool,” Morcom adds.
Noncompete agreements are enforceable regardless of whether an employee quits, is fired, or is laid off.
Confidentiality agreements and policies provide a proactive layer of protection to assist with preventing breaches and may also be useful to the employer when a breach occurs.
Confidentiality agreements can be similar to noncompetes in that they can pertain to trade secrets and proprietary information and can also pertain to information such as Social Security numbers, medical information, marketing plans and cost lists. Under a confidentiality agreement, employees are not permitted to share or disclose information they learn or acquire while working in the business.
A confidentiality agreement can appear as a policy document, be included within a noncompete agreement, or can be a separate and distinct agreement. If it appears as policy, it is important that employees sign off that they received the policy and understand its contents.
This can be done in several ways, including the use of an acknowledgement form that coincides with the employee handbook.
Also, confidentiality in the workplace is not limited to private-sector business. Consider public-sector jobs, such as a county office like domestic relations or the prothonotary, where personal identifying information (e.g., Social Security numbers, dates of birth, addresses) may be used on a daily basis by employees. This information should remain confidential.
Separation/severance agreements are another vehicle used by the employer when parting ways with an employee — for example, when a position is eliminated. This is another opportunity for the employer to include language binding the employee regarding confidentiality and/or noncompete.
What Employees Need to Know about Violating Noncompete Agreements
The impact to employees is monetary damages for the breach of the agreement, but the job they go to can also be affected.
“They will more than likely lose the new position,” Morcom advises. “In many instances, the original employer will sue the second employer along with the former employee. The second employer typically doesn’t want to be involved in litigation related to the new hire.”
If an employee signed a noncompete agreement, they should always provide a copy of the noncompete to future employers to determine whether a true conflict exists. It is important for the new employer to determine whether they could be exposed to liability.
“Employees should recognize that a forensic analyst can track the electronic fingerprint. This includes determining when, how, and the frequency at which the employee accessed confidential company records,” Morcom adds.
It’s also important to understand the dynamics involved with social media connections when it comes to noncompete agreements.
“While clients can become ‘friends’ on Facebook, an employee may argue that they were ‘friends’ or associated via other social channels long before the individual became a client of the company,” says Morcom. “This can be established through a history of social media data/posts.”
However, the employer may also have relevant data that contradicts the employee’s position on a “friend’s” status.
Even though social media may add a twist to who is and who is not a client, this doesn’t alter the employee’s obligations under the noncompete, Morcom explains.
“The friend was still a client of the employer, and the employee would likely be found to be in violation of the noncompete, regardless of the social media connection to the employee.”
Written agreements are key in any business. Since the relationship between employers and employees is a business in itself, noncompete and confidentiality agreements are best established and signed at the time of engagement or hire to keep employees from walking away with your business.