Savvy business owners realize the value of key employees. The savviest business owners consider the execution of a strong non-compete agreement with key employees to avoid costly fallout when key employees leave the business.
The loss of client lists, pricing models, customer relationships, and business goodwill—along with loss of key employees themselves—could prove to be damaging and costly to a business. Non-compete agreements are vital instruments for businesses to protect against such losses, and are becoming more common in technology, medicine, and service-oriented industries, among other fields.
Consider a few of the many issues that should—or must—be addressed in order to create a legally enforceable and workable non-compete agreement with an employee:
Legal Requirements. State statutes and case law vary as to how broad or narrow non-compete agreements will be enforced. In Oregon, for example, non-compete agreements will only be enforced if:
- The employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a noncompetition agreement is required as a condition of employment, or the noncompetition agreement is entered into upon a subsequent bona fide advancement of the employee by the employer – and note that “bona fide advancement” generally requires more than just increased compensation and a new title;
- The employee is an individual engaged in administrative, executive, or professional work who performs predominantly intellectual, managerial or creative tasks, exercises discretion and independent judgment, and is paid on a salary basis;
- The employer has a “protectable interest,” which includes but is not limited to when an employee has access to trade secrets, or access to competitively sensitive confidential business information or professional information; and
- The total amount of the employee’s annual gross salary and commissions, calculated on an annual basis, at the time of the employee’s termination exceeds the median family income for a four-person family, as determined by the United States Census Bureau (currently $67,315).
California law is even stricter, and prohibits non-competition agreements except in the context of preserving goodwill in the purchase of a business entity. Idaho law limits the application to “key employees” and independent contractors, and includes additional guidelines (such as a presumption that 18 months is a reasonable period of time). Washington has no statutory scheme, but does require consideration of whether the public might be harmed by the loss of certain kinds of services.
In addition to the statutory and case law limitations, most states typically require that a non-compete agreement must be “reasonable” as to how long it lasts and the geographic area it covers. The definition of “reasonable” varies, of course, but the basic idea is that restraints of trade are disfavored, and therefore any covenant not to compete should be narrowly-tailored to protect the business interests without completely eliminating the individual’s ability to work in his or her chosen field.
While a full discussion of such requirements are beyond the scope of this article, suffice it to say that a well-crafted, enforceable non-compete agreement could save a costly legal endeavor in the long run.
Practical Considerations. Which categories of “key employees” will be required to sign non-compete agreements? If a prospective employee refuses to a non-compete agreement, should you proceed with the employment relationship anyway? Would a non-solicitation agreement protect your interests sufficiently? In the long run, given your employer-employee relationship, would non-compete agreements suppress motivation or creativity? Is a non-compete agreement practical or advisable given your particular business model or industry? These are all questions that should be vetted prior to consideration of crafting and executing non-compete agreements.
Execution of non-compete agreements—and litigation over non-compete agreements—has increased substantially over the last decade. Given the legal and practical issues that abound when an employer considers a non-compete agreement with a key employee, the advice of a trusted adviser is critical to enforceability of the instrument, and making informed decisions for important relationships with key employees.
Please feel free to contact Jason Yarashes, Randy Duncan, or another Business lawyer or Labor & Employment lawyer at 503.242.0000 if you are interested in discussing legal and practical considerations of non-compete agreements with your employees.