What a relief. You've just completed the long and complicated job search process. You've effectively negotiated a position with a successful company, and you're looking forward to being part of a cutting-edge team. You show up for your first day at work, bursting with innovative ideas, excited to learn the ropes from the experienced people that you met during the interview process.
But before you roll up your sleeves and get to work, there's just one more detail to attend to. The human resources department will reassure you that it's a minor detail-just a few forms to fill out and a couple standard documents to sign-but in reality these documents are not minor. In fact, it's vitally important that you're well versed in their intricacies before you sign on the dotted line. What you will be filling out are covenant documents, and they can seriously affect-even suspend-your employability for a specified period of time after you leave the company.
Should I Sign?
There are many varieties of covenant documents (see the Sidebar "Covenant Varieties Defined"), but non-compete agreements will be the focus of this article because of the strictures they place on future employment options.
It's important to keep in mind that by the time you sit down to sign covenant documents, you will have already accepted the position, therefore, in most cases whether or not to sign such documents is usually not an option. Marshall Tanick, a partner with the Minneapolis-based law firm Mansfield Tanick & Cohen, in his article "Non-Compete Contracts: Uses and Abuses," describes the circumstances this way: "The employee has very little bargaining power and generally is not too concerned about limitations on future employability when beginning a new job. Consequently, employers generally present these non-compete agreements on a take-it-or-leave-it basis, and most employees have little ability or motivation to decline to sign them or to negotiate less onerous terms. But when an employee decides to leave a job, the non-compete agreement may be a significant impediment to future employment or may prevent employees from becoming self-employed."
Tanick's description of the circumstances surrounding the signing of non-compete agreements might make you question why companies would ask employees to give up potential future employment before they accept a job in the first place. It may even lead you to wonder: Is your new employer out to get you?
Watching Their Back
Covenant documents have been around for a long time, but they've been experiencing a growth spurt with the rapid advancement in technology. A tech company's edge in the marketplace is the latest schematic for a smaller chip, a single section of code, or a vital new piece of information. If (and more often when) that information gets out to the competitor, the company immediately has to go back to the drawing board because their edge is lost.
Companies need a way to protect their assets, which, more often than not, can be tallied up in the intellectual abilities of their employees. Covenant documents allow them to do this.
Is It Enforceable?
There is no short answer to this question. Every state has its own laws governing the degree to which a non-compete agreement can be enforced. Tanick lists a set of considerations that a court will examine when a non-compete dispute comes before it, and they are paraphrased below for brevity. For Tanick's complete article,
- Rule of Reasonableness: In order to be valid, the agreement must be reasonable in its specifications. The overall goal is to protect the interests of the company. The company's demands, however, shouldn't restrict the individual's rights to gainful employment. Tanick states, "Courts recognize that employers have a legitimate interest in protecting the time, investment, and other resources they have invested in employees, but that interest must be balanced against employees' job mobility in a free enterprise system."
- Independent Consideration: Some companies offer the employee compensation for the restrictions they place on them. Possible compensations might include a raise, a better than average severance package, access to outplacement services, or contacts for future employment with acceptable (non-competitive) companies. In many states, these independent considerations are necessary to the validity of the agreement.
- Duration and Distance: Every case is governed by its own specifics. That said, one or two year's duration are common time restraints in non-compete agreements. The area from which a company draws its business influences the distance. Tanick points out, "In today's global economy, the distance is less significant than it has been in the past. But if an employer has a particular market area, courts may refuse to enforce non-compete agreements that extend beyond that [area]."
- Blue Pencil Rule: Some states have the flexibility to modify non-compete agreements when they are being disputed. Other states have to uphold or invalidate them as they were originally written.
- New Employer Liability: In many states, an employer that hires a competitor's former employee, who is then in violation of his/her non-compete agreement, can be sued along with the former employee. Some companies will choose to pay legal fees and take a risk on the employee if that individual is up front with them, but they need to be given the choice.
What Are My Rights?
As with any legally binding contract, you always have a choice of whether or not to sign the agreement. Be aware, however, that the company has an option not to hire you if you refuse to sign the agreement. There is no need for you and your future employer to reach a stalemate; there are steps you can take to safeguard your future employment options while also complying with your new company's requirements.
Research Your State's Laws
It's imperative to be well informed about your state's laws regarding non-compete agreements. Preparing beforehand will give you an idea of how careful you need to be when signing a covenant document. For example, in California and New York non-compete agreements are very limited in their scope, assuming they can be enforced at all. But according to www.myemploymentlawyer.com, a service of Fortney & Klingshirn and Neil E. Klingshirn, non-compete agreements are generally enforceable.
To be on the safe side, you might want to look up a business lawyer in your area and ask them about the enforceability of non-compete agreements in your state before you enter into negotiations with potential employers.
The time to ask about covenant agreements is after you have received an offer of employment, but before you accept the position so it can be part of the negotiating process. If the company uses a non-compete agreement, ask for a copy so you can review it or show it to a lawyer.
Neil Klingshirn, of the Ohio-based law firm Fortney & Klingshirn, has this to say about the process of negotiating a non-compete agreement: "First, you should ask to limit the agreement to that which is necessary to protect the employer. Second, if it is necessary to prevent you from working for a period of time in a highly specialized industry or occupation, ask for severance payment in the event of an involuntary termination that is not for cause. If the employer really needs this protection, it can pay for it."
It is important to keep a level head when negotiating non-compete agreements. Remember that the company is trying to look after their interests, and they aren't out to get you. This is the beginning of your working relationship with the company. Your future employer will have far more confidence in you and you in them if you can reach an amicable agreement that protects both of your interests.
Read the Employee Handbook
Covenant documents aren't always stand-alone documents; sometimes there
are non-competition clauses written into employee handbooks. This is the
reason human resources personnel will commonly stress that it is important
to read the employee handbook thoroughly. Occasionally, there is a last
page to the handbook that new employees must sign and turn in as evidence
that they agree to abide by the contents found within the handbook. Look
for subheads reading "Non-Compete Agreement" or "Non-Disclosure
Statement" within the handbook.
Covenant Varieties Defined
The Non-Competition Agreement
This is the broadest in scope amongst the many varieties of covenant agreements. It's a document or a clause within another document that prohibits the employee from entering into competition either independently or with a company's competitor. This particular agreement can limit future employment options for the employee based on location or over a period of time set by the employer.
The Non-Disclosure Agreement
In this agreement, the employee consents not to disclose any vital company information (i.e., trade secrets or other confidential business information) to competitors either while employed by the company or after employment.
The Confidentiality Agreement
This is a non-disclosure agreement that works both ways. Both the employer and employee agree to refrain from giving away the company's vital information to any competitor.
The Non-Solicitation Agreement
The employee promises not to solicit the existing customers of
the company when he/she leaves the company either to work for a
competitor or to start his or her own business.