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Employment Law

The official Frantz, McConnell, and Seymour, LLP blog.

Employee Non-Competition Agreements Part 3: You Mean They Can Stop Me from Working?

My final post in this 3 part series addresses non-competes from the employee's perspective. I am regularly retained to review noncompetition agreements (“noncompetes”) by employees who were fired or resigned to accept another job.

Unfortunately for many of them, they were not familiar with and sometimes even aware of the noncompete terms before leaving their employment. In fact, many of them either were not provided a copy when it was first signed, or they did not ask for one. Another sad truth is that many employees who are handed a copy of their noncompete in an exit interview had no idea of its significance or legal effect until they needed to find a new job.

Noncompete agreements are serious legal documents. They have the potential to significantly disrupt people's lives. Someone may spend 15 or 20 years working in one industry developing a valuable knowledge set. Her family becomes rooted in one community. She receives an offer from another employer 5 miles away that offers a significant pay increase or the opportunity to acquire an ownership interest. After accepting the position and starting work, she receives a "cease and desist" letter from an attorney threatening a lawsuit if she continues in that position or another "competitive" position anywhere in Tennessee or 3 others states adjoining it. If she does not comply in a very short time period, she likely will be served with a lawsuit and a restraining order issued by a judge prohibiting her from continuing her new employment until a court hearing occurs. Most likely, her new employer will also be sued for "interfering" with the former employer's contractual right to keep its former employee from competing with it.

The time for reviewing a noncompete is not after you start work in a new job if the new employer can even remotely be defined as a competitor. There are 3 points at which a noncompete should be reviewed by legal counsel. Not surprisingly, the first is before you sign it; yet unfortunately, very few people take the opportunity at that time. I suspect the most likely explanations for this are financial and psychological. Many people starting new jobs may have missed a paycheck or two between the last job and the new one. Incurring the cost of a contract review may be quickly dismissed as a luxury. Further, few people start a new job expecting a problem.  Optimism usually runs high at the beginning of a new employment.  I also believe many people fear creating a negative impression to their new employer if they ask too many questions about the terms of employment.

Here is a list of things you should do before signing a noncompete:

  1. Ask questions during the interview process. You should know before any offer is made if your prospective employer expects you to sign a noncompete.
  2. If you are informed that you will be expected to sign one, ask for a copy of the noncompete when the offer is made. Do not sign a document of such significance without the opportunity to study it and obtain legal advice.
  3. Obtain legal advice. I understand this is rather self-serving advice coming from a lawyer who practices in this field. The fact is, however, legal analysis at this stage will cost a fraction of the expense you will incur if sued on the document.
  4. Do not listen when your prospective employer tries to minimize the document to discourage you from reviewing before signing, or suggesting that " it's just a formality," or "it's nothing to be concerned with."
  5. Consider whether you have a strong bargaining position so that you may negotiate different terms. Most employers have the upper hand to the extent that you must sign the document as is if you want the job. The question for most employees is whether the position is worth the restrictions should they leave or lose their job. Some prospective employees are in a much better position to bargain. Those that bring a large book of business with them or other unique skills may be able to refuse a noncompete or perhaps negotiate severance terms that compensate them for some portion of the noncompete period if involuntarily terminated.

The next point at which a noncompete should be reviewed is when you are considering leaving on your own. Many noncompetes are well drafted. Many are not and are vague regarding key terms such as what is competitive activity and the geographic area covered. Some are so poorly drafted they may be unenforceable. This is information you will need to know in order to determine if you can safely stay in your current community or if you will need to consider a move in order to stay in the same field. Taking a new job before undertaking this review is where serious mistakes causing dire financial consequences occur.

The final point of review is when you have a new offer in hand after being fired. In addition to the considerations discussed above, legal counsel may be able to outline strategies for negotiating some lesser restrictions from the written terms of the noncompete. Employers are sometimes willing to consider altering restrictions if former employees approach them openly and honestly about possible changes to the noncompete that allow the employee to earn an income without seriously threatening the employer's business.  Many businesses appreciate former employees who approach them before commencing potentially competitive employment to discuss the offer in hand, whether it is deemed competitive and if so, whether any changes can be made to the noncompete to accommodate the employee’s need for employment.

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