What Every Employee Should Know About Non-Compete and Non-Solicitation Agreements
A non-compete contract is an agreement signed by an employee in which he or she agrees that he or she will not participate in certain employment within a certain geographic area for a certain period of time after he or she resigns or is fired. Likewise, the non-solicitation contract obliges the worker not to contact the employer’s clients or the rest of the workers under the same conditions. These restrictive contracts have become more prevalent in Michigan, especially in the technology sector, where companies believe they have legitimate business interests that need to be protected.
Non-compete and non-solicitation contracts created a very difficult set of problems for employees. And it’s not just top-level workers who are often forced to sign such contracts. It should come as no surprise that corporations have enormous leverage in forcing business owners, high-level executives, and low-level workers to sign these restrictive contracts.
Many employers require the employee to sign such an agreement to obtain employment, or after being hired, to keep their job. Unfortunately, most employees believe they have little or no influence and sign these contracts with little thought, review, or negotiation. In too many cases, employees are willing to do anything to secure a good job and naively assume they will work there forever. They are wrongly informed that such contracts are unenforceable, or they assume that the non-compete will never affect them.
Much of the mythology and confusion surrounding non-compete issues today is because Michigan’s view of non-compete has changed over the past two decades. Michigan courts used to find the non-compete anticompetitive and therefore unenforceable in Michigan. This all changed in 1987 when Michigan passed Section 4(a) of the Antitrust Reform Act. It is now Michigan public policy to enforce reasonable non-compete provisions in employment contracts.
So what do you do if your boss or investment group presents you with a non-compete or no-solicitation agreement? Often the non-compete contracts presented to employees are extremely broad and effectively bar employees from working in the entire market if their employment is terminated for any reason. Other non-compete agreements may allow the employee to work in their chosen field of expertise, but only if they are willing to move to a different state, beyond the employer’s competitive territory.
Here is my list of the top 10 tips for employees if you find yourself facing the barrel of a non-compete or non-solicitation agreement:
1. If you are considering signing a non-compete or non-solicitation agreement, be prepared to live with it as written. You may not be able to afford a short action to attack it. Even if you can fight the contract in court, judges have a wide range of discretion and are unpredictable in how they will handle one of these contracts.
2. Do everything possible to avoid signing a non-compete or non-solicitation contract. Take an initial position that you won’t sign and see how flexible your employer can be. If they love you enough, they may be willing to live with a trade secret agreement instead.
3. If you are forced to sign a non-compete agreement, negotiate the terms as narrowly as possible. Make sure it is reasonable in scope (duration, market description, geographic region).
4. Remember, the employer must have a legitimate business interest to protect. Force the employer to tell you exactly what he is trying to protect. Typically, this means protecting trade secrets, confidential information, or an investment in an employee’s training and skills. Get it in writing. If you are never exposed to such information or receive the training, you will be in a good position to have the non-compete declared invalid.
5. If you are forced to sign a non-compete agreement, get additional compensation, a signing bonus or compensation for a period after your employment ends (severance package).
6. Try to avoid non-compete language, in favor of a no-solicitation clause, which prevents you from instigating contact with your employer’s clients if you must leave. If worded correctly, this will still allow you to go to work for a competitor and will also allow customers who contact you to be served by you in the future. It is much easier for a new employer to isolate you from contact with certain clients than it is to find a position for you that does not compete with your old employer.
7. If you are forced to sign a non-solicitation clause, be sure to distinguish between clients you bring to the employer and clients provided through your new employer. Just agree not to ‘solicit’ customers after you leave. Do not agree not to serve them if they are looking for you or if they are already clients of your new employer.
8. Never agree to pay the employer’s attorneys’ fees if you decide to challenge the non-compete agreement. Employees are often forced to go to court to ask the judge to limit the non-compete terms. You will have to pay your own attorney’s fees; you don’t want to have to pay for the employer’s attorney as well.
9. Monitor employees who leave the company while you are still employed there and determine whether or not the company is imposing non-compete terms against those employees. Companies can’t “perfectly pick” employees to enforce a non-compete clause. If you can show that the company did not enforce the non-compete law against others, your non-compete law may become unenforceable.
10. Be sure to tell any prospective employer if you have signed a non-compete agreement. There is no use getting a new job and having your new employer receive a threatening letter 30 days after your new job. It’s better to be upfront and allow your new employer to try to negotiate the non-compete language in a way that allows your employment.
Once an employee signs a non-compete agreement, options become more limited in seeking new employment. Yes, non-compete can be attacked in court. Yes, an employer must have a legitimate business interest to protect in order to support non-compete. Some non-compete terms are too broad or do not protect legitimate business interests. The courts must strike down such non-contest or limit the terms to a more reasonable extent. However, employees are often not in a position to pay thousands of dollars to a lawyer to attack a non-compete in court. Such a lawsuit is the last line of defense for an employee seeking to challenge the non-compete.
Employees must be extremely careful when entering into non-compete or non-solicitation agreements. Too often, employees convince themselves that they need the job so badly that they’re willing to sign up for anything. When work doesn’t work out, those same employees may find themselves without job prospects. Sophisticated employers specifically ask new job applicants if they have signed non-compete agreements, and many will avoid hiring employees who have signed them. Many prospective employers know that they will be seen as “deep pockets” and will be prosecuted if they hire someone who is allegedly in violation of a non-compete agreement. These new employers are liable if they benefited from the employee’s skills and customer contacts in violation of the non-compete law.
In today’s economy, and especially in the technological economy, no job is safe. Even if you are lucky enough to have an employment contract that requires the company to keep you on staff for several years, there is no guarantee of permanent employment in Michigan. I always tell my clients, I hope for the best and plan for the worst. In other words, assume your job won’t work. As with many legal matters, a couple hundred dollars spent up front for legal advice can save an employee thousands of dollars down the road and put that employee in a position to gain gainful employment if they lose their job. . When it comes to non-compete and non-solicitation agreements, an ounce of prevention is really better than a pound of cure.