By Cliff Ennico
“I run a small service business that’s been around for 30 years. As I get older I’m getting tired of running this business alone. I want to hire and train a general manager to run the business day to day, with the understanding that when it comes time to retire I will pass ownership of the business on to this person.
I have found the absolutely perfect person to hire as manager. He works for a competing company, and is absolutely miserable there (the owners are real S.O.B.s). I can offer this young man a better future, and he recognizes that.
The problem is that earlier this year his employer made him sign a noncompete agreement – they threatened to fire him if he didn’t sign.
I’m not a lawyer, but the agreement looks pretty bad. It says he cannot ‘own (other than ownership in a publicly traded company), operate, manage or participate in the ownership of any company or control of any person, company or entity which is in competition with’ his current employer for two years after he leaves the company.
I would like to hire this person – he has amazing skills our company needs — but I don’t want to get sued. I’ve heard that noncompete agreements are often not enforceable in the courts. Is that true?”
Courts do not like noncompete agreements in employment contracts, and often construe them very narrowly against employers. Except in a handful of states (such as California) that have banned them outright, however, you cannot assume that a noncompete agreement won’t be enforced.
If this noncompete agreement is upheld, there’s a good chance that your employee will be sued by breaching his contract, and that his former employer will sue you for “tortious interference” with the contract (“inducing” the employee’s breach). This is more than likely to occur because you clearly knew about the noncompete agreement before you made the employee an offer to switch jobs.
Sadly, it looks like whoever drafted this agreement knew what he or she was doing. They did not bar the employee from working for a competitor – which a court would almost certainly strike down as it would deprive the person of the right to earn a living – but rather said he cannot own or operate a competing company in an executive or managerial capacity (where presumably he would be tempted to disclose or make use of his current employer’s trade secrets, contacts and confidential information, the prevention of which is the true purpose of a noncompete agreement).
You will need to speak to a local lawyer who specializes in employment litigation or disputes, as there might – might – be a way for you to hire this person without triggering the noncompete agreement.
Here are the questions you should ask the lawyer:
- Whether the fact his current employer “put a gun to his head” to make him sign the agreement renders it invalid for lack of proper legal consideration;
- Whether you and the other company are actually “competitors” under the agreement;
- Whether the noncompete agreement can be circumvented by hiring this person in a nonmanagement capacity (for example, as a clerk or warehouse employee) for the two-year noncompete period; and
- Given the extremely broad scope of the agreement, whether a court in your state is likely to grant an injunction barring the employee from working for you until the noncompete agreement can be sorted out.
If after speaking to the lawyer you do decide to hire this person and take the risk of a lawsuit from his current employer, be sure NOT to:
- Give him any sort of title as an officer or manager of your company;
- Compensate him as if he were an officer or manager of your company – for example, do not give him a share of your business’ profits or shares of stock in your company (although you may be able to give him options to acquire shares in your company once the two-year noncompete expires);
- Tell customers, vendors and other third parties that he has authority to bind your company to contracts;
- Allow him to solicit business from any customers of his current employer (unless your company had a pre-existing relationship with that customer); or
- To the extent possible, allow him to communicate with other employees of his former employer (if this is not practical – because, for example, some of these people are personal friends or relatives — he should be coached to tell them he cannot make them any offer of employment with your company).
Frankly, I wouldn’t advise a client to take the risk in this situation, especially given your observation that his current employer’s owners are S.O.B.s. In my experience, S.O.B.s are more likely to sue you than nice people, and I’m sure there are plenty of other fish in the sea if you take the time to look for them.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.