What every employee should know about non-competition and non-solicitation contracts

A non-compete contract is an agreement signed by an employee in which he or she agrees that he or she will not engage in a certain job within a certain geographic area for a certain period of time after he or she resigns or is fired. Likewise, a non-solicitation contract obliges the employee not to contact the employer’s clients or the remaining employees under the same conditions. These restrictive contracts have become more prevalent in Michigan, especially in the technology sector, where companies believe they have legitimate business interests that must be protected.

The non-competition and unsolicited contracts created a number of very difficult problems for employees. And it’s not just upper-level workers who are often forced to sign such contracts. It should come as no surprise that companies have tremendous influence in forcing business owners, upper-level executives, and lower-level workers to sign these restrictive contracts.

Many employers require the employee to sign such an agreement to obtain employment, or after being hired, to keep their position. Unfortunately, most employees believe they have little or no influence and sign these contracts with little thought, review, or negotiation. In too many cases, employees are willing to do anything to secure a good job and naively assume that they will work there forever. They are wrongly informed that such contracts cannot be enforced or they assume that non-competition will never affect them.

Much of the mythology and confusion surrounding non-competition issues today stems from Michigan’s view of non-competition having changed over the past two decades. Michigan courts used to view non-competition as anti-competitive and therefore unenforceable in Michigan. All of this changed in 1987 when Michigan passed Section 4 (a) of the Antitrust Reform Act. It is now Michigan public policy to enforce reasonable non-compete provisions in employment contracts.

So what do you do if your boss or group of investors presents you with a non-compete or non-solicitation contract? Often times, the non-compete contracts presented to employees are extremely broad and effectively prevent employees from working across the entire market if their employment terminates for any reason. Other non-competitors may allow the employee to work in their chosen field of expertise, but only if they are willing to move to a different state, beyond the competitive territory of the employer.

Here is my list of the top 10 tips for employees if you find yourself staring down the barrel of a non-compete or non-solicitation agreement:

1. If you are considering signing a non-competition or unsolicited agreement, be prepared to accept it as written. You may not be able to afford a short action to attack it. Even if you can fight the contract in court, judges have a wide range of discretion and are unpredictable in how they will handle one of these contracts.

2. Do your best to avoid signing a no-bid or non-compete contract. Make an initial stance that you won’t sign and see how flexible your employer can be. If they love you enough, they may be willing to live with a trade secret agreement.

3. If you are forced to sign a non-compete, negotiate the terms as strictly as possible. Make sure it is reasonable in scope (duration, market description, geographic region).

4. Remember, the employer must have a legitimate business interest to protect. Force the employer to tell you exactly what they are trying to protect. Typically this means protecting trade secrets, confidential information, or an investment in an employee’s training and skills. Get it in writing. If you are never exposed to such information or do not receive the training, you will be in a good position to have the non-compete declared invalid.

5. If you are forced to sign a non-compete, get additional compensation, a signing bonus, or compensation for a period after your employment ends (severance package).

6. Try to avoid non-compete language, in favor of a no-application clause, which prevents you from instigating contact with your employer’s clients if you must leave. If written correctly, this will still allow you to work for a competitor and also allow customers who contact you to be served by you in the future. It is much easier for a new employer to isolate you from contact with certain clients than to find you a position that does not compete with your old employer.

7. If you are forced to sign a non-application clause, be sure to distinguish between the clients you bring to the employer and the client provided through your new employer. Just agree not to “solicit” clients after you leave. Do not agree not to serve them if they seek you or are already clients of your new employer.

8. Never agree to pay the employer’s attorney fees if you choose to contest non-compete. Employees are often forced to go to court to ask the judge to limit the terms of non-compete. You will have to pay your own attorney’s fees; you don’t want to have to pay for the employer’s attorney as well.

9. Monitor employees who leave the company while you are still working there and determine whether or not the company is imposing non-competition conditions against those employees. Companies cannot “select” employees to enforce non-competition. If you can show that the company failed to enforce non-compete against others, your non-compete may become unenforceable.

10. Be sure to inform any prospective employer if you have signed a non-compete agreement. There is no use getting a new job and having your new employer receive a threatening letter 30 days after your new job. It is best to be frank and allow your new employer to try to negotiate non-compete language in a way that allows your employment.

Once an employee signs a non-compete agreement, the options become more limited in seeking a new job. Yes, those who do not compete can be attacked in court. Yes, an employer must have a legitimate business interest to protect to support non-competition. Some non-compete language is too broad or does not protect legitimate business interests. Courts should override those non-powers or limit the terms to a more reasonable scope. However, employees are often not in a position to pay thousands of dollars to an attorney to attack a non-compete in court. Such a lawsuit is the last line of defense for an employee seeking to challenge non-competition.

Employees must exercise extreme caution when entering into non-compete or unsolicited agreements. Too often, employees convince themselves that they need the job so badly that they are willing to sign anything. When work doesn’t work out, those same employees can find themselves without future job prospects. Sophisticated employers specifically ask new job applicants if they have signed non-compete agreements, and many will avoid hiring employees who have signed them. Many potential employers know that they will be viewed as the ‘deep pockets’ and will be taken to court if they hire someone who is allegedly violating a non-compete contract. These new employers are liable if they benefited from the employee’s skills and customer contacts in violation of non-competition.

In today’s economy, and especially in the tech economy, no job is safe. Even if you are lucky enough to have an employment contract that requires the company to keep you on staff for several years, there is no guarantee of permanent employment in Michigan. I always tell my clients, I hope for the best and plan for the worst. In other words, assume your job won’t work. As with many legal matters, a couple hundred dollars spent upfront advising an attorney can save an employee thousands of dollars down the line and put that employee in a position for gainful employment if they lose their job. When it comes to non-competition and non-solicitation agreements, an ounce of prevention is truly better than a pound of cure.