Former employees and business associates become competitors every day.
When hiring others to work on your team, be mindful that employees and contractors might:
- Leave and start a competing practice;
- Go to work for a competitor;
- Solicit your clients; or
- Use and/or disclose company confidential information.
So, how do you reduce the risk of training your future competitors?
The best business relationships are grounded in trust and mutual benefit. Many people work on a handshake understanding, which is fine until something goes wrong. A little paperwork on the front end can prevent problems down the road. But, all the paperwork in the world won’t prevent someone from leaving. So, to retain key people, they need to feel that this situation is a “good fit” for them.
Tip: Be fair and reasonable about your terms and compensation. Recognize and reward the contributions of high-performing employees and contractors.
The following documents can be used to protect your interests. Your agreements should be reasonable and use plain English (avoid legalistic boilerplate!). Being heavy handed in your agreements may actually be counterproductive.
(1) Non-Compete Agreements
Requiring employees and contractors to sign ‘non-compete’ agreements is a common practice. Unfortunately, the enforceability of non-compete agreements is often unclear.
The basic rule is that non-compete agreements will be enforced if they are:
- Fair and reasonable (in scope, duration & geography);
- Protect legitimate business interests; and
- Do not impose substantial hardship (preclude a person from earning a living).
What is fair and reasonable? It’s a legal concept that gets interpreted differently in different industries and locations. For example, a reasonable term for a non-compete in a traditional company may be one year. For Internet companies, the reasonable term may be 6 months or less because the technologies and markets are changing so quickly.
Tip: Non-Compete Agreements - Less restrictive is more effective.
Using a boilerplate agreement, “one size fits all situations” is not a good approach. You are usually better served by tailoring an agreement to the specific employee/contractor and identifying the specific business interests that you are protecting (e. g. , customer confidential information). The courts are showing a trend of enforcing less restrictive non-competes and not enforcing broad, boilerplate agreements.
(2) Non-Solicitation Agreements
With a non-solicitation agreement, you can protect your legitimate business interests without unduly restricting an employee or contractor’s ability to earn a living. Non-solicitation agreements are more easily enforced than broad-based non-compete agreements.
Tip: Add non-solicitation provisions to your agreements, such as:
“You agree not to divert any business opportunities from the Company to yourself or to any other person or business entity. “
“You also agree that for a period of one year following termination of this agreement, that all clients to which you were introduced by Company shall be considered Company clients and that you will not pursue or accept any additional work with those clients without written permission from Company. In the event that you violate this provision, you agree to pay Company 20% of your first year billings to Company’s clients. ”
(3) “Assignment of Rights” for employees
Usually, employment terms provide that an employer owns the rights to works produced by an employee. The employee is the inventor (patent) or creator (copyright) and it is important to have a clear assignment of the employee’s rights to the employer. Without such assignment, inventions of the employee belong to the employee, even though the employee developed the invention during work hours and using the employer’s materials and equipment. The employer retains “shop rights” in the invention. This means that the employer can use the invention without cost in its operations.
Tip: Require employees to sign an invention disclosure and rights assignment form.
(4) “Work for Hire” for contractors
An independent contractor retains rights in works that s/he creates unless there is an explicit statement that it is a “work made for hire. " Contractor agreements need to clearly identify that the Company owns the rights to works created and whether any intellectual property rights are retained by the Contractor.
Tip: Include in the independent contractor agreement a provision that says contractor is performing a “work for hire” and contractor assigns all rights.
In conclusion, it is a good business practice to protect the company’s rights by requiring that employees and contractors sign an agreement that includes confidentiality, non-competition, non-solicitation, and assignment of rights provisions as well as specifies the scope of work and compensation. If you use a standard agreement, it should be reviewed periodically by a knowledgeable business attorney, to ensure that it covers the legal bases in light of recent court decisions.
Doing the paperwork up front reduces the risk that you are training your future competition.
Jean D. Sifleet, Esq, CPA is a practical and experienced business attorney. Jean has extensive experience in dealing with intellectual property matters in the large and small companies and as a small business owner. She has authored numerous books and publications on avoiding legal pitfalls in doing business. This article is excerpted from her new book, A"dvantage IP – Profit from Your Great Ideas" (Infinity 2005). For more information, Jean's website is http://www.smartfast.com .