At Sierra Crest Business Law Group, I often get asked the same question. The question is, “how can I protect my business from a key employee who leaves the company and then goes into competition against me”?
There are three types of agreements that you should have in place with your key employees. We will discuss these agreements, and then at the end, I will also give you an additional bonus tip that you can also consider in your business.
Three Agreements To Protect Against Employee Competition:
- A Solid Non-Compete Agreement
So the first kind of agreement you want to have in place with your key employees is sometimes called a (non-competition agreement), sometimes called a (non-compete). And what a (non-compete agreement) does is it asserts that the employee, when he or she leaves your company, cannot compete with the company, and the agreement will have three restrictions on it.
a. Geographic Restriction
The first is going to be a geographic restriction. It may be Reno, for example, or maybe the state of Nevada or worldwide, but we’ll have some geographic scope.
b. Time Restriction
The second restriction is a time restriction. It may say the employee can’t compete with your company for six months, twelve months, two years, or five years. The bottom line is that it’s going to have some time limitations.
c. Activity Restriction
The third, which is as important or more important than the first two, is the type of business activity the former employee cannot engage in during or after employment, and that typically would match up with the kind of service or product that your company offers.
Now the key with all three of these restrictions is that under the law, they have to be reasonable and reasonable means different things to even different judges.
And so that’s a discussion that you want to have with your business law attorney. The goal would be to zero in on the most reasonable restrictions that are most likely to hold up in court.
Some people ask, “are non-competition agreements enforceable in Nevada?” The answer is “yes,” but when you consider the reasonability restriction, sometimes those are enforced differently by the judges in Nevada. And sometimes they’re completely thrown out of court if the judge finds them to be beyond reason. So as a recap, the first document you should have in place is a non-competition agreement.
2. Confidentiality Agreement
The second type of agreement you want to have in place with any of your key employees is a confidentiality agreement. And what the confidentiality agreement does is it tells the employee that he or she cannot personally use the company’s confidential information and cannot share that sensitive information with other people. When we talk about classified information, it can vary from company to company.
Most companies are going to consider their customer lists and information on those customer lists to be confidential. Most companies believe their strategic plans to be secret. Some companies have proprietary processes for delivering their services, producing, or delivering their products. It’s essential when you talk to your business attorney to be clear about and precise about what is critical confidential information in your company that gives you a competitive advantage.
Once that’s clarified and defined, treat it as confidential and included it in your confidentiality agreements.
- Non-Solicit Agreement
The third type of agreement that you need to have in place with your key employees to keep them from leaving the company and competing with you is what is often called a (non-solicitation) or a (non-solicit agreement). This agreement tells a former employee that they cannot hire the company’s employees away from the company. Also, you cannot try to lure the company’s customers to leave our company and go to your company. There’s going to be some restrictions on how far you can go in a non-solicitation agreement, and there’s a reasonable amendment to the Nevada revised code on this subject. Still, by and large, a fair non-solicitation agreement is enforceable in the courts, and it’s an essential layer in your protection against critical employees leaving the company and going into competition with you.
Bonus Strategy
As a business owner need to think about how you interact with your customers. If, on the one hand, you leave all of that interaction to one single employee and that employee runs the account, services the customer, and they do everything that the customer needs, the customer is going to start to shift their loyalty to that one key employee. And if they haven’t changed their allegiance to that person, they’re at least going to consider that person as being the one who is most knowledgeable and capable of meeting their needs.
On the other hand, you, as a business owner, can set things up so that instead of one individual delivering the vital service or product to the company, you have a team that is providing that service.
So make sure that you’re spreading responsibility out among various team members in your company so that the customer doesn’t view one specific individual as being the key to their needs getting met. Instead, the customer begins to understand that the team functions as a whole and that they can rely on the team even if one particular member of the group shifts responsibilities or leaves the company.
So that’s your bonus tip! Do business with your customers through a team rather than give all of the responsibility to one specific individual.
If you’d like to talk about any of these concepts that we’ve discussed in greater detail or with specific business goals in mind, I encourage you to reach out and give us a call. One of our business attorneys at Sierra Crest Business Law Group would be happy to sit down and talk about how you can strengthen your business and protect against a key employee leaving the company, and then competing with you.