By:  S. Eric Bass, J.D., M.B.A.

If you’re a business owner, you know that your most important assets are your employees.  The conduct of just one employee can affect your sales, public perception, industry reputation, and overall employee morale.  Many employees have access to your important business information, access to vital customers and suppliers, control of services rendered by your business, and major industry contacts because of their roles.  That’s why many owners are concerned about how they can best protect their businesses when an employee leaves to work for a competitor or start a new business.  Fortunately, options exist to protect your business from competition or misconduct by former employees. But before making a decision, you should carefully consider the powers and limitations the most common options.

Non-Compete Agreements

Non-compete agreements, sometimes called covenants not to compete, attempt to restrict an employee from leaving your business and competing directly with you in a similar business.  The limits on these agreements are usually imposed by state laws and state court decisions, which can vary greatly and be quite severe.  In North Carolina, non-compete agreements must be:

• Written
• Based on valuable consideration—that is, you must pay or compensate the employee for signing them
• Reasonable as to the time and territory restricted
• Protective of the employer’s legitimate business interests
• Not against public policy

Also, many recent decisions by North Carolina courts have placed further restrictions that cannot be fully described here.  In essence, there are many hoops to jump through, and the rules change frequently.  If you are considering non-compete agreements for new or existing employees, you should be sure to confer with an attorney that works regularly in this area to prepare a document that will have the maximum enforceability.

Non-Solicitation Agreements

Much like non-compete agreements, non-solicitation agreements are designed to protect your company from unfair competition.  These agreements restrict an employee from soliciting your customers, employees, or suppliers for certain periods of time.  These agreements do not necessarily have to be restricted to a certain geographic area but should have some reasonable time limitations.  They should also be written to meet the requirements of applicable state laws.  These agreements can also list specific customers that your business may specifically want to protect. This will require more thought on your part but will make the agreement more enforceable.  Many employers and employees prefer these agreements over non-compete agreements because they protect more specific legitimate business interests, are more likely to be enforceable, and seem fairer to employees.

Confidentiality Agreements

While there are state and federal laws designed to protect your business’ trade secrets and confidential information, you may want to have certain employees sign confidentiality agreements as well.  These agreements create additional protections while making sure that the employee knows you intend to protect your rights.  Like non-compete agreements, confidentiality agreements should be written and drafted with very specific requirements.  You should also make sure you have good measures in place in your business to mark confidential information and make sure that it is properly secured—otherwise you risk losing the protections of a written agreement.

No-Disparagement Agreements

You may also be concerned about things that employees may say about your business after they leave, especially if you did not part amicably.  A no-disparagement agreement states that you and your employee agree not to say bad things about each other to third parties.  Like the other agreements mentioned above, no-disparagement agreements have limitations.  If an employee is required by a court or a regulatory agency to make statements, then a no-disparagement agreement will most likely not be able to prevent the employee from making disparaging comments about your business.  However, the agreements can be useful to help prevent a disgruntled former employee from hurting the reputation of your business in ordinary business or their day to day life.

Implementing the Agreements

These four agreements are the main options available to an employer concerned about unfair competition from current or former employees or disclosure of your confidential information.  You may consider using one or a combination of all the agreements, but drafting these agreements is not the end of the story in the real world.  You should be sure to update the status of such agreements on a regular basis with your attorney.  You should also put forth the effort to keep your confidential information private and maintain your relationships with your key employees, customers, and suppliers separate from any one key employee.  The experienced business and employment lawyers at Venn Law Group can help you draft these agreements and design and implement policies that will make them more effective.

If you decide to seek enforcement of one of these agreements, be aware that it can be a costly and time-consuming process, especially if you do not have solid evidence of bad behavior.  Be sure to seek counsel that is experienced in this area early and keep them advised of all developments.  Also, if you consider hiring an employee bound to his or her former employer by one of these agreements, be sure to seek counsel on the possible ramifications to you.  You, as the new employer, may expose your business to claims by hiring that person.

Lastly, try to remember that it is hard to have only the “stick” and no “carrot.”  You should consider incentives for proper employee behavior such as competitive compensation, performance bonus programs, loyalty bonus programs, phantom stock plans, special benefits, and even some ownership for the right employees.  You may be surprised at their effectiveness. For more information on “carrots” for key employees, click here.

S. Eric Bass is an attorney at Venn Law Group who holds both a law degree and MBA, providing him with a wealth of knowledge and insight regarding the challenges business owners face. He has more than 18 years’ experience in the areas of mergers and acquisitions, succession and exit planning, business partner agreements and issues, business formation, franchising, contract negotiations, strategic planning, and employment issues. Eric was recognized by U.S. News – Best Lawyers for 2019-2020 and The Best Lawyers in America in Employment Law – Management for 2019-2021.