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Is A Noncompete Agreement Right For Your Business?

NCAs are becoming an increasingly common feature in the United States

9Jun

Just when Kristen Cox thought she was out, Macy’s pulled her back in. Or more accurately, the noncompete agreement (NCA) Macy’s had Cox sign in 2012 pulled her back.

Cox made news when she took Macy’s to court over the company’s enforcement of a noncompete agreement to prevent her from taking a position at Burlington. She had been a Chicago-based regional executive vice president for Macy’s before taking a severance package in 2012. That severance package came with an NCA that attorneys for Cox now characterize as 'unreasonable and unlawful.'

Setting aside the plight of a retail executive for a moment, the question Cox put to a federal court about NCAs is worth considering for all employers. NCAs are becoming an increasingly common feature in the United States’ business landscape, and every business leader could stand to learn more about the legalities of them.

The Rise of Noncompete Agreements

Approximately 40% of U.S. workers have signed an NCA at some point in their career. The agreements, traditionally used to protect a business’s investment in trade secrets or client lists, are more common in creative and technology fields.

There’s a tendency to think that only top-tier business secrets like Colonel Sanders’ 11 herbs and spices are subject to NCAs, but in reality, the reach of these kinds of agreements is much more broad. Employers are doling out noncompetes regardless of advanced degrees or high salaries. An estimated 15% of employees without undergraduate degrees are bound to noncompetes, and 14% of employees with yearly earnings of less than $40,000 have signed them as well.

Not only does a noncompete protect against the misuse of corporate secrets, but it is also a kind of insurance policy for the investment a business makes in its employees. A thriving business has a certain chemistry to it, and losing a seasoned pro from your team can disturb a perfect formula. Unfortunately, this kind of chemical chaos is happening more often with the rise of globalization and poor leadership development within companies.

Legal Uncertainty

As market forces spur companies to hedge their losses with NCAs, they may only be getting a false sense of security.

Just as Kristen Cox is attempting to prove in her tilt with Macy’s, the legality of NCAs is no longer quite so clear-cut. First, it is important to note that the legal requirements of a binding and enforceable NCA vary state by state. If someone is drafting or challenging a noncompete, a wise first step is to consult a local business attorney to tailor the agreement to his or her needs.

In California, for example, an attorney might tell clients they’re out of luck, as the state’s courts refuse to enforce noncompetes. That is a left-coast trend that may be making its way across the country, as legislation was introduced in six states this year to tighten or abolish noncompetes. Four states recently passed new laws on noncompetes — including Illinois, which voided noncompetes for employees making less than $13 per hour.

Like virtually every other path you choose for your business, you should make an informed decision to pursue a noncompete agreement or not. Here are a few tips to help you decide:

1. Make Sure It’s Worth the Paper It’s Printed On

After getting a signed copy of the agreement, your first step is to ensure the agreement is enforceable. An NCA must have a narrow focus. There are three classic boundaries put around these agreements: time, area, and how you define a competitor. A judge will likely rule agreements as enforceable if they last only one or two years, apply to a limited geographic area, provide a short list of direct competitors, or specify that the employee can’t start a competing business.

2. Know All the Details Before Enforcing the Agreement

It seems obvious, but you’ll need to have proof that a former employee violated the agreement. Focus on investigating former employees who had access to information that could inflict significant harm on your business interests. Recipes, profit margins, or customer lists are just a few types of information that an NCA should protect.

When it comes to gathering the evidence, hiring a private investigator can be a cost-effective way to obtain the information you need to make the leap from suspicion to knowledge. An investigator is uniquely skilled to collect data on where the ex-employee is working or whether the employee is in a position to use your protected information.

3. Make Sure the Employee Had a Reason to Sign

NCAs that don’t offer an employee any form of compensation for signing them are often deemed unenforceable. In most cases, if employment is contingent on signing a noncompete, the job itself is considered compensation for the agreement.

The New York federal courts will get to decide whether Cox is beholden to Macy’s noncompete agreement. But if you have thought through these details at the beginning of your relationship with an employee, an NCA can be an effective tool in protecting your business against the competition.

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