You can legally restrict, or in some cases prohibit, competition with your business through use of binding Non-compete Agreements. A Non-compete Agreement is essentially a contractual provision, or a separate agreement itself, that prevents one of your employees, consultants, agents or independent contractors from engaging in activities that compete with your business. Non-compete agreements go beyond the non-solicitation of customers and directly limit the activities which the departing employee or contractor can conduct, or will limit the departing employee from working for certain employers. A broad non-compete may completely preclude an employee from working in any capacity with an employer who competes in any area with your business. Similarly, an overly broad non-compete provision can restrict an independent contractor from competing against your business indefinitely.
But, broad and overly burdensome non-compete restrictions may, and often are, struck down by a court as unreasonable. Much like non-solicitation and other restrictive covenants, a non -compete restriction which essentially places a significant burden upon the person to find or engage in the restricted activities will generally not be favored. Courts addressing restrictive covenants analyze the enforceability of such agreements on a case-by-case basis. In analyzing whether a provision is reasonable, courts generally weigh three factors: (1) geographic area in which the possible use of the trade secrets or customer knowledge will pose a substantial risk to the employer’s business; (2) period of time that will legitimately protect the employer and not impose undue hardship on the former employee; and (3) restricts competition in the specific type of business activity in which the employee was engaged.
TIP! A far better approach is to limit any non-compete restriction you use in scope, location and duration.
Basically, the courts will attempt to make sure the restrictions are not overly burdensome to the employee and so should you. The enforceability of restrictive covenants is a function of state law. Several states, including California, have enacted laws to restrict or limit the use of these covenants. Generally, these restrictions must protect some significant business interest. The courts commonly consider the position of the employee. The reasonableness of a restriction may depend upon the profession, industry or position of the employee within the company. For instance, the indispensible technology manager will be analyzed differently than a customer service rep. Generally, most courts will enforce a restrictive covenant when the employee had access to the employer’s trade secrets, has developed substantial relationships with customers, or where the employee performed services that are special or unique.
Many states are known as the “blue pencil rule,” which means that the court can modify a provision to some degree in order to make it enforceable. For example, if a geographic restriction is over-broad, a court may narrow the geographic scope to make it enforceable rather than invalidate the entire provision. However, you should still include severability type language authorizing the court to reconstruct the covenant if necessary just in case.
From an enforceability standpoint, the best practice is to require employees to sign a restrictive covenant at the time of a promotion, salary increase or receipt of some other benefit to ensure that there is additional consideration to support the restriction. From an enforceability standpoint, the best practice is to require employees to sign a restrictive covenant at the time of a promotion, salary increase or receipt of some other benefit to ensure that there is additional consideration to support the restriction.
TIP! Whether you use a separate agreement to enforce these restrictions, or address them in your employment agreement, be certain each restriction can stand alone. It should be able to be easily separated from the other restrictive covenants and not blended together in one paragraph. The court should be able to sever one provision easily without killing the entire agreement. If the court does not like an inseparable restriction, it may be forced to get rid of all of them. In order to avoid this, each restriction should be used in a separate paragraph or section and you should use separate and specific headings.
Dealing with Independent Contractors & Consultants
Now that you understand restrictive covenants and how to use them, you should be certain to apply some of the same restrictions to your independent contractors. If you deal with consultants, vendors, service providers or other parties that might work with or become familiar with any of your employees or customers, you should use non-solicitation language. This should cover non-solicitation of both customers and employees to the extent necessary. Many Internet based businesses outsource duties such as answering phones and other clerical support duties. Depending on why you are hiring an independent contractor, they may have considerable contact with your employees and/or customers. For example, consultants usually work very closely with key employees of the business that hired the consultant. Deterring your consultants, vendors, independent contractors, etc. from stealing your employees and customers should be of great concern to you.
Restrictive Covenants With Your Independent Contractors
You should make sure you include both types of non-solicitation provisions directly in your independent contractor, consultant or other service agreements. These provisions usually serve as a strong deterrent. Remedies can include a broad range of relief and require the contractor to pay attorneys’ fees if you prevail in court. This can certainly make any of your contractors think twice. It may be difficult to enforce broad non-compete provisions restricting competition via the Internet. But, enforcement of non-solicitation provisions is much more likely, as I mentioned. Using a separate non-disclosure/confidentiality agreement isn’t necessary. Just be certain to place these provisions in your independent service type agreements.