Do you really need a non-compete?

Inc.com columnist Jeff Haden is taking your start-up questions. Up this week: How to handle an employee who won't agree to a non-compete.

Dear Jeff,

I'm in the process of hiring a new employee and he says he will refuse to sign our standard non-compete agreement. Should I let it go and ask him to sign one later? — Name withheld at request

Let’s deal with the “value” of a non-compete agreement first.

Many entrepreneurs make non-compete agreements a standard part of the employment contracts new employees sign. People who are eager to work for a start-up—in other words, the employees you most hope to attract—also harbor dreams of someday launching their own start-ups. So a non-compete makes sense.

Just don’t expect a non-compete agreement to protect your company or to result in a big payoff if violated. Ask Specialized, the bicycle manufacturer that spent approximately $1.5 million to sue two former employees.

The judge recently found in Specialized’s favor on one claim and awarded $1 in damages.

Non-compete agreements are certainly enforceable. The problem is that just like with, say, copyright infringement, it’s your job to do the enforcing. (You can't call the Non-Compete Police Department.) Enforcement can be more difficult depending on the jurisdiction (see: California, State of) or the nature of the agreement.

In general the courts tend to lean towards protecting an employee’s ability to make a living after they leave a previous job. As lawyer Charles Pelkey says, “The promise not to compete isn’t a promise to starve.”

Sound like I’m against non-compete agreements? I’m not. It’s important to do everything possible to protect trade secrets. Just make sure your non-compete agreement includes language and terms that give it a reasonable shot at being enforceable in your state. And make sure you're willing to accept any backlash that comes your way; the bigger your company, the more others might think you're just throwing your weight around.

Now for your prospective employee. The situation gets sticky if you hire him today and ask him to sign a non-compete a month from now.

One of the most common reasons a court will toss a non-compete claims is when the employee did not receive consideration; a non-compete agreement is a contract, and contracts require the exchange of consideration in order to be valid.

That’s a non-issue for a new hire because they automatically receive consideration: You agree to hire him and he agrees to the terms of the agreement.

But if you ask him to sign the agreement later you’ll need to provide additional consideration: More money, more benefits, a positive change in employment status (say, from at-will to contract-employee)… something of value the employee would not have received otherwise.

Plus, keep in mind the consistency factor: If you require some new employees to sign non-compete agreements you should require all new employees to sign the agreement. A policy you do not apply consistently is not a policy. If you feel a non-compete agreement is important, require all new employees to sign at the same time they sign the rest of their employment documents.

If they won't, don't hire them.

Have a start-up question? Email questions@blackbirdinc.com and it may appear in a future column. Please indicate if you would like your name and company name to appear.

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