Picture this: It’s Friday night, you’re gearing up for a relaxing weekend when suddenly, a frantic message from a client lights up your phone. A trusted employee has been snatched away by a competitor, leaving your client’s business model hanging by a thread. Sound familiar? Welcome to the rollercoaster ride of non-compete clauses – where the stakes are high, and the rules are ever-changing.
In the not-so-distant past, non-compete clauses were the go-to shield for businesses, crafted to encase departing employees in a web of restrictions tighter than a spider’s embrace. But hold onto your hats, because the winds of change have blown fiercely in recent years.
- Gone with the Wind: The era of blanket non-competes is fading fast. No longer can employers cast a net so wide it rivals the ocean.
- Welcome to the Hotel California: California has been a haven to employees since 1872 as the State does not recognize non-compete clauses in pure employment context (there are narrow exceptions for sale of a business). Last September, the Golden State took it a step further to expand its ban on non-competes to contracts signed outside of the state if the employee in question then moves to California. Colorado,[1] Minnesota, Oklahoma, and North Dakota followed suit in the last decade and generally banned non-competes. In Massachusetts, the general ban only applies to non-exempt employees,[2] employees terminated without cause, interns and minors. For the rest, the non-compete covenants are only enforced if they are for a year or less, reasonable in their scope and the employee otherwise receives consideration.[3]
- Changing Tides. Some States, once hailed as business-friendly havens, are reevaluating their stance. New laws and regulations are cropping up like wildflowers, reshaping the landscape of employee contracts from coast to coast. For example, New York state legislature recently proposed a new law which, if implemented, will be similar to the restrictions in Colorado (i.e., a general ban on non-competes with narrow exceptions applying to individuals with a certain income threshold). Also Delaware judges, fed up with the number of enforcement suits by otherwise desperate employers, are no longer willing to do the trimming of excesses for you and will simply through the whole non-compete clause in trash if it is not reasonable.
- Navigating the Maze. The bad news is that the good old fashioned non-competes don’t work the way they used to (you may still have a shot if you are selling a business but even in that context, the restrictions should be narrow and for a legitimate business purpose). What you can do, however, is to ensure you have solid confidentiality and “work for hire” and IP assignment provisions with your employees, consultants and other service providers. Also make sure your IT system can monitor activity right before a termination (or close to the year-end or the beginning of the year when employees are more likely to say adios after cashing out their bonus!). Having exit interviews and getting employees to sign a confirmation of confidentiality can’t hurt either. Also, if you are in certain lines of business (for example employee leasing), consider adding a no-poaching restriction in your agreement with your business partner (note the limitations should still be reasonable or otherwise you may violate antitrust laws). Also, if your employee is getting equity as a part of their compensation, make sure to tie vesting to the respect of the relationship!
- The Role of Sage Counsel. But perhaps the most crucial step of all? Finding a legal ally who knows the lay of the land in every state—a guide through the labyrinth of regulations and loopholes. At SIP Law, we’re not just attorneys; we’re navigators in the ever-changing seas of business law.
So, as the tides of non-compete agreements ebb and flow, remember: adaptability is the key to survival in this wild, untamed world of business. And with the right guidance, you can chart a course to success, no matter how stormy the seas may get.
[1] There is a narrow exception for employees that make more than a certain yearly income.
[2] Remember your internal sales person is required under FSLA to be classified as non-exempt so you can’t really enter into a non-compete with them if they are in MA.
[3] This is typically 50% of the highest base salary over the 2 years preceding termination.