A guide to non-compete and non-solicit agreements
Ignorance isn't always bliss, especially in Colorado's tight labor market
In Colorado's tight labor market, companies are constantly competing for talent. This is especially true in our booming technology industry, where employees frequently move between competitors. With that looming threat of job-hopping, previous employees have the potential to take valuable information or recruit former colleagues outside the hallowed halls of your company and to a competitor.
As a result, it is important to evaluate how you are protecting your people and property. It is also imperative for companies to assess whether their hiring and on-boarding practices put them at risk fo being sued by a competitor.
When it comes to protecting information, keeping employees engaged and retained is the best security. Sound recruiting and retention practices are key to that effort. However, even the best practices cannot prevent employee turnover.
Accordingly, many companies turn to non-compete and non-solicit agreements.
The former prohibits an employee from working for competitors, or in the consulting industry, clients, after an engagement comes to a close.
Non-solicitation agreements prohibit employees from seeing a company's customers for employees or the company's employees after leaving.
However, there are limits to the protections that non-compete and non-solicit agreements can provide.
Colorado statute limits the enforceability of non-compete and non-solicit agreements. As such, it is important to get legal advice to understand how likely it is that the company will be allowed to enforce these covenants.
In addition, companies should consider taking steps to improve the likelihood that former employees and competitors will comply with those agreements after a departure and to reduce the likelihood of a violation and suit.
On the flip side, when a company hires an employee form a competitor, the company could be at risk of a lawsuit from the competitor. For example, if the employee was exposed to the competitor's trade secrets, the competitor may sue for trade secret misappropriation – claiming that the employee used the former employer's confidential material for the company.
Additionally, if the employee signed a non-compete or non-solicit agreement with the competitor, the competitor could sue for the tortious interference with contract – claiming the company induced the employee to violate the non-compete or non-solicit agreements with the competitor.
An employee who uses trade secrets to the benefit of a competitor can be devastating for the company in question. Lawsuits between competitors over such matters can also be disruptive to business and costly.
Below are four steps that companies should consider taking to avoid these outcomes:
1. Ask questions during on-boarding
One of the key questions when deciding whether a competitor is liable for inducing an employee to violate a non-compete or non-solicit agreement is whether the competitor knew about the disputed non-solicit or non-compete agreement. While it may seem tempting, a company cannot avoid liability for tortious interference by purposefully failing to ask questions and hoping a candidate has not signed such an agreement – particularly in industries where such agreements are common. Companies should consider asking potential employees, outside recruiters, and staffing companies whether a candidate has entered any non-compete or non-solicit covenants. In particular, companies should consider adding a question about whether a candidate has any non-compete or non-solicit covenants on job applications. In addition, companies should consider including a representation that an employee has not signed non-compete or non-solicit covenants in employment contracts and contracts with staffing companies. The fact that an employee or staffing company denied having such restrictions or that there was a contractual representation to that effect can be important evidence that the company performed due diligence to avoid interfacing with such restrictions.
2. Provide a copy of agreements at departure
In addition to verbally reminding workers of any applicable restrictions during exit interviews, companies that obtain non-compete or non-solicit agreements should provide the employee with a copy of the executed agreement and should document what was provided. Not only will that ensure that the employee can consult the actual terms (as opposed to his or her potentially faulty memory), but it also makes it possible for the employee to provide the agreement to potential new employers.
3. Notify subsequent potential employers
Because an employer that was unaware of a non-compete or non-solicit agreement may not be held liable for inducing an employee to violate the agreement, it can be very important for a company to contact potential and subsequent employers to inform them of those agreements. In addition to verbal contact, companies should consider sending a copy of the agreements to potential and subsequent employers before or even after an alleged breach.
4. Get permission to notify potential and subsequent employers
When a potential or subsequent employer learns that a candidate or employee has signed a non-compete or non-solicit agreement, the employer may cut ties with the employee. A company obtaining non-compete or non-solicit agreements should consider including a provision permitting the company to notify potential and subsequent employers of the agreements. That way the company can make a potential or subsequent employer aware of the former employee's obligations while minimizing the risk a former employee will try to assert claims against the company if the former employee loses a job or an opportunity as a result of the contact.