Have you ever recruited the perfect job candidate only to find he had a noncompete agreement with a current or former employer? At a time when unemployment rates are low, the situation can be particularly frustrating. A common assumption is that legal liability for breaching a noncompete falls on the employee. Unfortunately, that’s not always the case. New employers potentially are liable for damages if they interfere with contractual obligations.
While the laws regarding employee noncompete agreements can be complicated and disconcerting, hiring such an individual without liability is sometimes possible.
Do Your Homework
Here are two questions to answer when faced with a noncompete:
Is the noncompete enforceable?
Noncompete agreements are subject to state laws. To be permissible, they typically have to be drafted carefully and contain strict limits on the employee’s restricted activities and the time period and geographic area in which they apply. Evaluate the enforceability by reviewing the following within the agreement:
- Does the period of restriction have a stated limit? Most state laws provide that a noncompete restriction must be limited in time, typically from one year to a few years. If a time limit is absent, the noncompete could be unenforceable.
- Does the noncompete agreement restrict the employee’s activities within a particular geographic area? In most states, the noncompete might apply only to the area in which the employee performed services or where the employer has business operations. A missing geographic limit could render a noncompete unenforceable.
- Does the noncompete agreement specifically address activities the employee is prohibited from engaging in? In some states, simply prohibiting an employee from working for a competitor is not enough. The agreement may need to specify the types of services and job responsibilities the employee must avoid.
- When did the employee sign the noncompete agreement? Was anything given in exchange for signing it? In some states, noncompete agreements can be signed only at the beginning of employment. In other states, requiring an employee to sign a noncompete as a condition of continued employment is acceptable. Additionally, some states might require that the employee be offered a raise or a bonus in exchange for signing the agreement.
Still, beware the blue pencil. Some state laws provide that a court can modify, or “blue pencil,” a noncompete if it contains provisions that would otherwise render it unenforceable. For example, if the state law requires that a covenant be limited to a certain number of months but the noncompete’s term is much longer, the employer could ask a court to modify the agreement to make it enforceable.
Can the job responsibilities be structured to avoid a violation?
Just because an individual has a noncompete does not necessarily mean he will be in violation in the new job. Read the agreement closely to find which job responsibilities are specifically prohibited. The individual might be able to perform duties that do not violate the terms.
Take Precautions
If a work-around is identified, these two tips can help if a dispute ensues:
- Draft the job description and employment agreement carefully. Document the new employee’s duties to demonstrate that the responsibilities do not conflict with the noncompete agreement. Doing this will help convince a third party, or a court, that the employee was not engaged in duties in violation of a covenant not to compete.
- Require the employee to agree to not violate the noncompete. A good employment agreement will document that the practice instructed the employee not to engage in prohibited activity. Here is suggested language:
“Employee agrees and acknowledges that Employee’s employment with Clinic and the performance of Employees duties pursuant to this Employment Agreement will not violate any non-competition agreement or other similar agreement between Employee and his or her prior employer.”
When a Violation Is Unavoidable
If you determine that the noncompete agreement is or may be enforceable, and there is no way to structure the job responsibilities to avoid a violation, here are four options to consider:
- The employee might be able to obtain a noncompete release from the ex-employer. A buyout might be demanded, so your practice could consider paying for some of it.
- The employee might be able to reach a compromise that allows for engaging in some activities and refraining from others. For example, the former employer might be willing to allow the employee to work for a competitor as long as he agrees not to solicit clients or former co-workers.
- Consult legal counsel to assess the risk of a claim. After careful consideration of the potential damages and costs, you might conclude that the risk is worth taking.
- If you believe the noncompete falls into a gray area, you could pursue a declaratory judgment. This is where you ask a court to declare the noncompete unenforceable as a matter of law.
Remember that any discussions or correspondence you have with the employee about his noncompete agreement could be subject to disclosure during any litigation that might result. These communications can weigh heavily in an assessment of whether a practice assisted an employee in breaching a noncompete. Engaging an attorney early in the process will help avoid missteps.