Top 10 Mistakes Employers Make With Non-Compete Agreements
While helping hundreds of companies to enforce their non-compete agreements and advising many employees on how to get out of them, I noticed that most companies make the same mistakes when it comes to drafting and enforcing their non-compete agreements. In this post, I share the top ten mistakes that often end up costing Texas companies their clients, goodwill, and a ton of legal fees:
- Not signing non-competes with employees. It seems like a no-brainer, but there are still a lot of Texas companies out there that do not require their employees to sign any non-compete agreements. This is a mistake. A reasonable non-compete agreement can benefit both the company and the employees. A company is more likely to invest into training of an employee with a non-compete agreement, and employees can still work in their chosen field after leaving the employer, subject to a reasonable geographic limit.
- Having restrictions that are too overbroad. Overreaching in non-compete agreements can backfire in that employees feel like they have no choice but to violate them in order to make a living and courts are not likely to grant a temporary retraining order or a temporary injunction on a non-compete that is clearly overbroad.
- Not having a legitimate business interest to protect. A Texas employer must share its confidential information or goodwill with an employee in order to create an enforceable non-compete agreement. An hourly employee, such as a sandwich-maker or a mechanic, is not going to have access to any confidential information or specialized training. Thus, most of the time, there would be no legitimate business interest in having such employees subject to a non-compete. Therefore, before asking an employee to sign a non-compete agreement, employers should ask, “What specific business interest am I trying to protect?”
- Making all employees execute the same non-compete agreement. Requiring the same 2-year / 200-mile non-compete agreement for sales people, secretaries, and C-level executives raises a red flag that the company is simply trying to prevent competition and is not protecting a legitimate business interest. Employees that perform different tasks or serve different purpose should have different non-compete restraints depending on what they do for the company.
- Not providing proper consideration. Different states require a different type of consideration for non-compete agreements. In some states, just a promise of future employment is sufficient. In other states, an employer must pay money to an employee in exchange for the promise not to compete. Texas companies should make sure that their non-competes are supported by the right type of consideration in the state where they plan to enforce the non-compete agreements.
- Not having new consideration. When asking an already-existing employee to sign a non-compete agreement, employers must provide new consideration for such agreement. For more information, see my previous post here.
- Not enforcing non-competes. Once the proper non-compete agreements are in place, companies should make it a policy to enforce them. Otherwise, the agreements lose their effectiveness with employees, who quickly learn from co-workers that the company never enforces the agreements.
- Not enforcing a non-compete fast enough. This is one of the gravest mistakes for companies in terms of consequences. The longer a company waits to seek a temporary restraining order against an employee who is violating his or her non-compete agreement, the more likely the court is to deny the restraining order because the company cannot show an “imminent” and “irreparable” injury. In other words, if the company has not tried to stop the bleeding, how bad could th bleeding really be and does the court really need to enter an emergency order?
- Not providing confidential information. As mentioned above, the proper consideration for a non-compete agreement in Texas includes a company’s promise to provide confidential information to the employee. Companies, however, must deliver on that promise and actually provide such confidential information in order to make their non-compete agreements enforceable.
- Not saving an electronic version of the signed non-compete agreement. In this day and age, when there is an electronic version of virtually every document, I often encounter the situation where an employee took the only signed copy of the non-compete agreement before leaving his or her employment. Given how popular and basic this tactic is, employers must make sure that they save an electronic signed version of their non-compete agreements in a location where employees cannot access and delete them or take them.
BOTTOM LINE: Spending some money at the front end of an employment relationship to make sure that the company is protected with a valid non-compete under Texas law can save a company ten times that amount in legal fees when the times comes to enforce the non-compete agreement.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.