TRAVERSE CITY – A non-compete contract is an agreement signed by an employee where he or she agrees that they will not engage in certain employment within a certain geographic area for a certain period of time after they quit or are fired. Likewise, a non-solicitation contract binds the employee not to contact the employer’s customers or 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 need to be protected.
Non-compete and non-solicitation contracts created a number of very difficult issues for the employees. And it is not just upper level workers who are often muscled into signing such contracts. It should not surprise anyone that companies have tremendous leverage to force business owners, upper level executives and lower level workers to sign these restrictive contracts.
Many employers require that the employee sign such an agreement in order to obtain employment, or after they are hired, in order to keep their job. Unfortunately, most employees believe that they have little or no leverage and sign these contract with little thought, review or negotiation. In far too many instances, 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 are unenforceable, or assume the non-compete won’t ever affect them.
Much of the mythology and confusions surrounding non-compete issues today, is because Michigan’s view of non-competes has changed over the last two decades. Michigan courts used to view non-competes as anti-competitive and, thus, unenforceable in Michigan. This all changed in 1987 when Michigan passed Section 4(a) of the Anti-Trust Reform Act. It is now the public policy of Michigan to enforce reasonable non-competition provisions in employment contracts.
So, what do you do if presented with a non-compete or non-solicitation contract by your boss or investor group? Often times, the non-compete contracts pushed in front of the employees are extremely broad and effectively preclude employees from working within the entire market altogether if their employment should end for any reason. Other non-competes might 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 top 10 list of employee tips if you find yourself staring down the barrel of a non-compete or non-solicitation agreement:
1. If you are considering signing a non-compete or non-solicitation agreement, be prepared to live with it as written. You may not be able to afford a court 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 whatever possible to avoid signing a non-compete or non-solicitation contract. Make an initial stand that you won’t sign and see how flexible your employer may be. If you they want you bad enough, they may be willing to live with a trade secret agreement instead.
3. If forced to sign a non-compete, negotiate the terms as narrowly as possible. Make sure that it is reasonable in its 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 attempting to protect. Typically this means protecting trade secrets, confidential information or an investment in an employee’s training and skill. Get it in writing. If you are never exposed to any such information or do not receive the training, you will be in a good position to have the non-compete declared invalid.
5. If forced to sign a non-compete, obtain extra compensation, a signing bonus or compensation for a period after your employment ends (severance package).
6. Try and avoid non-compete language, in favor of a non-solicitation clause, which precludes you from instigating contact with your employer’s customers if you should leave. Properly drafted, this will still allow you to go work for a competitor and will also allow customers who contact you to be serviced by you moving forward. It is much easier for a new employer to insulate you from contact with certain customers, than to find a position for you which does not compete against your former employer.
7. If you are forced to sign a non-solicitation clause, make sure to distinguish between customers which you bring to the employer, and customer provided through your new employer. Only agree not to ‘solicit’ customers after you leave. Don’t agree not to service them if they seek you out, or are already customers of your new employer.
8. Never agree to pay the employer’s attorneys fees if you should choose to challenge the non-compete. Oftentimes, employees are forced to court to request the Judge to limit the non-compete terms. You are going to have to pay for 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 employed there and determine whether or not the company is forcing the non-compete terms against those employees. Companies may not “cherry pick” employees to enforce a non-compete. If you can show that the company failed to enforce the non-compete against others, your non-compete may become unenforceable.
10. Make sure you tell any prospective employer if you have signed a non-compete agreement. It doesn’t do any good to obtain a new job and have your new employer receive a threat letter 30 days into your new employment. It is better to be up front and allow your new employer to try and negotiate the non-compete language in a way that allows your employment.
Once an employee signs a non-compete agreement, options become more limited in seeking new employment. Yes, non-competes can be attacked in court. Yes, an employer has to have a legitimate business interest to protect in order to support the non-compete. Some non-compete language is too broad or do not protect legitimate business interests. Courts should strike down such non-competes 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 in order to attack a non-compete in court. Such a lawsuit is the last line of defense for an employee looking to challenge the non-compete.
Employees must be extremely careful in entering into either non-compete or non-solicitation agreements. Too often, employees convince themselves that they need the job so badly that they are willing to sign anything. When the job doesn’t work out, those same employees can find themselves without employment prospects moving forward. Sophisticated employers specifically ask new job applicants whether they’ve signed non-compete agreements, and many will avoid hiring such employees who have signed them. Many prospective employers know that they will be viewed as the ‘deep pockets’, and will be dragged into court if they hire someone who is allegedly violating a non-compete contract. These new employers do have liability if they benefited by the employee’s skills and customer contacts in violation of the non-compete.
In today’s economy, and especially the tech economy, no job is secure. Even if you are fortunate enough to have an employment agreement which mandates that the company keep you on staff for a number of years, there is no guarantee of permanent employment in Michigan. I always tell my clients, hope for the best, and plan for the worst. In other words, assume that your employment will not work out. As with many legal issues, a couple hundred doll