Keeping good employees
While noncompete agreements are intended to keep good workers from defecting to the competition, more positive incentives often yield better results
By Victoria Fraza -- Industrial Distribution, 2/1/1998
Finding qualified people to work in distribution has never been more difficult. But what's often harder is keeping those employees once you've found them. With such a tight labor market, there's no telling when companies could lose a valuable employee to their competition. So it's natural for employers to want to protect themselves from that possibility.But how do you go about doing that? Paying competitive salaries, offering comprehensive benefits including health coverage and retirement plans, and just plain old good treatment are probably the surest ways to keep quality employees. But in light of today's competitive market, employers are investigating more creative and in some cases restrictive measures to retain employees.
Some things employers are beginning to look at are noncompete agreements and other restrictive clauses included in employment contracts. While those agreements have been around for a while, they are gaining steam in many industries. And though noncompetes can be valuable tools for employers, legal experts caution they must be drafted carefully if they are to be enforced. Still, employees are often reluctant to sign noncompetes, forcing employers to look at positive incentives such as retirement plans, stock options, and other perks that vest over a period of time as more valuable weapons in the war to keep good employees.
The noncompete agreement
A noncompete agreement or clause, or a covenant not to compete, states that an employee will not work for a competing firm (or start his own competing firm) for a certain period of time in a certain geographic area after leaving his current employer. A noncompete will usually contain a clause stating that an employer can seek an injunction against an employee who breaches that agreement. The conditions of the agreement can vary in terms of duration, geographic coverage and activation period, but lawyers agree these details should be outlined specifically in the agreement. A court will not enforce noncompetes that are too general or broad.
"[Noncompetes] have to be carefully drafted because they will be carefully scrutinized by courts," says Michael Lyle, an attorney in the litigation department of the Chicago firm D'Ancona and Pflaum. "A lot of times courts view them as restraints of trade, so they have to be reasonable.''
George Keeley, a Chicago attorney who represents the National Assn. of Wholesaler-Distributors, emphasizes that noncompetes are issues of state not federal law, so their terms and conditions vary state by state. The state where the employee performs the majority of his services or duties is where the noncompete should comply, he says.
Lyle adds that some courts require that a noncompete be part of a worker's employment relationship -- it must either be part of a contract or be contingent upon some other consideration such as a raise. In other words, an employer must offer the employee something in return for giving up the right to work for a competing firm. In examining a noncompete, this is one of the first things a court will look for.
A second thing courts look for, says Lyle, is whether or not the covenant not to compete is reasonable and necessary to protect a legitimate business interest of the employer. A legitimate business interest could include trade secrets such as formulas, processes, etc. Other legitimate business interests could include customer relationships -- near-permanent relationships with customers that the employee would not have learned about if he hadn't worked for the employer. Most contracts, says Lyle, include additional restrictive clauses -- such as non-disclosure and non-solicitation clauses -- that keep employees from divulging trade secrets or taking customers away from the firm.
If the first two criteria are met, courts are then likely to examine whether or not the noncompete is reasonable in terms of duration and geographic scope. For example, if the employer does business in three states, yet the noncompete bars the employee from working anywhere in the country for a year, courts are likely to judge that as unreasonable. Excessive time periods can also be judged unreasonable.
"The courts don't want to prevent someone from earning a living,'' says Jim Marks, an attorney with Holleb & Coff in Chicago. "If an employee has spent five or six years with a company, it's totally unrealistic that the employee should have to move 25 miles away to do what they've been trained to do.''
High-level executives are most likely to be asked to sign noncompetes, because they often have access to trade secrets or other valuable pieces of company information, says Lyle. But the kind of business you're in is going to dictate what kinds of restrictive clauses you need to have in a contract and who they will be applied to. In distribution, for example, a non-solicitation clause would be an important element because one of the most valuable things a distributor has to protect is his customer base.
There are other steps employers should take to help protect valuable company information and to potentially enforce a noncompete agreement. Marks urges his clients to treat confidential information as such -- mark it as confidential when they can, limit employee access to such information, and keep it under lock and key if possible. Lyle adds that such preventive measures as establishing policies, using passwords and conducting internal audits can help guard against vital information falling into the wrong hands.
"The best thing is prevention,'' says Lyle. "An assessment or an audit isn't that expensive if you think about what can happen down the road.''
From an employee perspective, legal experts agree that you have to be aware of what you're doing when you sign a noncompete. Like every contract, says Keeley, they have to be read and employees have to understand what they are giving up. Employees can refuse to sign noncompete agreements, and then it is up to the employer to decide whether or not they want to take the risk and hire the employee anyway. It's always helpful, says Keeley, for employees to have their attorney examine an employment contract before signing it.
Employees who have signed noncompetes have the courts on their side in most states, but there are still steps they can take to protect themselves when leaving their job. Marks urges his employee clients to take nothing with them except personal effects. Essentially, he says employees need to "keep their noses clean'' because if the employer decides to enforce the noncompete in a court, the focus should be on the contract and not on the employee's behavior.
"If I'm representing an employee,'' he says, "I'll say, let's litigate the contract to whether or not it's reasonable, not whether or not you've taken business away.''
Other options
Recent business trends are contributing to the prevalence of noncompete agreements and other restrictive clauses. For instance, employees no longer feel as if they have to stay with an employer for a long period of time. Likewise, employers will downsize at the drop of a hat. Also, as companies become more specialized and sophisticated, they have much more at stake.
"These types of contracts have been around for a while,'' says Marks. "I think what you're seeing, because the labor market is so tight, is a lot of companies are looking at these as a way to keep employees. And I don't think it will work.''
Keeley argues that the number of noncompete cases is not increasing; rather, the trend is toward courts bending over backwards looking for ways not to enforce them. Whatever the case, experts agree that using noncompetes to replace good management is not going to work.
"I think the mistake that a lot of companies make is...they try to use these contracts in lieu of good management,'' says Marks. "If you want to keep a stable workforce, you need to compensate people adequately, but using these contracts is something courts will be resistant to. And employers will oftentimes lose.''
Bob Gariano, a former executive with W.W. Grainger and now a recruiter with Russell Reynolds Associates in Chicago, agrees that there are more positive steps employers can take to keep from losing good employees to the competition. While noncompete agreements are difficult to enforce, Gariano says he sees more and more firms using stock options, restricted stock that vests over a period of time, deferred payments, and special retirement plans as ways to make employees want to stick around.
In today's market those kinds of plans have a twofold purpose, Gariano explains. First, when a company is considering hiring a new executive, it must consider the recurring cost of employment as well as the transition cost of hiring that employee. For example, if an employee is walking away from restricted or vested stock, the hiring company is most likely going to have to compensate the employee for that loss. While it's critical for the employee to think about what he's going to lose by leaving a company, employers must think about what they have to pay to gain that employee.
Most experts agree the lower you go in an organization, the more difficult it is to enforce noncompetes. But Gariano says companies can push stock options, deferred pay packages, and most importantly deferred vesting of retirement plans into the lower levels. He points out that many companies have moved the vesting period for stock options from six months to three years -- which ties the employee to the company, if they want to gain from the options.
"To do that,'' says Gariano, "is to maintain the best employees."
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
