Hiring a new employee is typically a moment of optimism—and sometimes, the relationship really does go wonderfully for its entire length and ultimately ends on good terms. But when that hope is treated as an assumption, companies make themselves vulnerable. If a client-facing employee does not have a non-solicitation agreement, a business’s customers could be poached. A new employee, hired because of their great industry relationships, might actually have an undisclosed non-compete or non-solicit with a competitor—and suddenly, your business is being sued. Strong contracts are an essential part of protecting the business against unexpected outcomes.

​Using Contracts to Protect Business Assets

By requiring upfront agreement on boundaries to protect the business—such as agreements regarding non-solicitation, non-competition, confidentiality, invention assignment, and non-disparagement—a business both discourages disloyalty in the first place and has ammunition if an employee later crosses the line.

Companies often invest substantial resources into relationships, whether with employees or with business partners, but these relationships can be vulnerable to poaching. For example, an employee may look effective and helpful to customers because of institutional support that costs the business time and money, but which is invisible to the customer, who assumes the individual employee deserves all credit. A non-solicitation agreement bars a former employee from trying to ​hire the company’s employees and/or from trying to do business with the company's clients for a fixed period of time after the relationship ends. This protects the company's investment in those relationships.

Most businesses depend on information that they would not want a competitor to have. If a confidentiality agreement is not written clearly enough, it might turn out to be a picket fence where barbed wire is needed. Confidential information is not just cutting-edge scientific research—it can also include hard-won insight into specific customer preferences, proprietary analysis of market trends, and much more. New hires who are likely to be given access to confidential information should generally be required to sign a confidentiality agreement that firmly protects the business’s informational assets. A confidentiality agreement needs to appropriately define the confidential information being protected and the expectations on the employee (such as not disclosing that information or using it outside non-disclosure and return of information at the end of employment). Similarly, invention assignment agreements ensure that the employee’s ideas—particularly those in line with the company’s own business, research, or development—belong to the business. This prevents employees from collecting a salary while developing ideas that would be valuable to the business—but keeping those ideas to themselves, possibly to use in competition against the business.

Non-solicitation and confidentiality agreements are important, but they can be difficult to enforce in time to prevent damage. A business often will not know that confidential information was given away or misused until it is much too late to the put the horse back in the barn. A non-competition agreement prevents a former employee from competing against the business for a fixed amount of time. Especially when a former employee has had access to confidential information and to valuable business relationships, this can be a valuable for tool for avoiding misbehavior. If an employee cannot work for a competitor at all, they are less likely to be in situations where they might violate other restrictions.

Finally, a non-disparagement agreement protects the company’s reputation. However, some employees may balk at agreeing to this upfront, before the relationship has even begun. Companies should consider whether a non-disparagement agreement is a term worth including as a hiring requirement. As with most employment terms, a company may decide that this term will be included for certain hires, but not all.

Agreements should match the specific needs of each employment situation; to be enforced, it is essential that they also match state law. State employment laws vary substantially. One state may require that a confidentiality agreement have an exception for sexual harassment; another may require certain carve-outs to invention assignment agreements; a third may impose an annual compensation minimum for non-solicitation agreements; a fourth may require that employees are told of their right to consult with counsel before signing a non-competition agreement.

An agreement that does not comply with applicable state law might not be enforceable, which means the company does not have the protection it thought it had. In some cases, a noncompliant contract raises additional issues: for example, in California, non-competition agreements are banned in most circumstances, and businesses face a penalty if they require an employee to sign one. Businesses should work with counsel on agreements that are appropriate to each circumstance and applicable state and federal law.

Hiring from Competitors

Conversely, businesses often hire people who have worked in the field before—perhaps even at a competitor. Even though the business didn't sign the employee’s prior employment agreement and is not a party to it, when a former employee breaches a contract to benefit a competitor, the competitor is typically sued alongside the employee.[1] Upfront preparation can reduce risks.

When hiring a new employee, a business may require the employee to confirm (as a written requirement of employment) that this job will not conflict with any other contractual commitments of that employee. If the employee raises a concern about another contract, the business should review the contract with counsel. In some instances, there may be an argument that the contract is not enforceable, and the employee and the business will each need to decide whether they are willing to take a risk. In some instances, there may be a confidentiality or non-solicitation restriction but no non-compete. In those cases, although employment is allowed, the former employer will likely be suspicious and may sue. When there are confidentiality and non-solicitation restrictions, businesses should strongly consider instructing the employee not to engage in any conduct that would violate those restrictions, and it may choose to be even more proactive by keeping the employee siloed from the customers or parts of the business that raise the contractual risk. Those protections can often be time-limited, such as to the amount of time remaining on a non-solicitation agreement.

​When ​a former employee does not have any prior agreement, a company has much more flexibility, but risks still exist. For example, the federal Defend Trade Secrets Act allows a business to sue for misappropriation of trade secrets, and a former employer may allege that a company misappropriated its trade secrets through the departed employee. Companies can reduce risks by providing instructions to employees that they should not use or disclose confidential information from any other business in their work.

Requiring Commitment

Employees sometimes engage in outside work. Guardrails set important expectations and give the business a clear exit ramp if an employee breaks the rules.

For some positions, it may be appropriate to restrict all outside work. Most businesses would not want their CEO to be managing another business on the side. In those cases, requirements that an employee to devote their full business efforts to the position, and not to engage in outside work, makes the expectation both clear and firm.

In other situations, outside work may be appropriate; additionally, some states have pro-moonlighting laws that protect employees’ off-hours activities. In those cases, agreements or policies create a moat of protection around the business. Businesses can set expectations around not participating in moonlighting during working hours, not using the business’s equipment for an outside venture, and similar issues.

Conclusion

By establishing clear rules up-front, a business encourages the right type of behavior from the beginning, and it is better able to defend itself against attacks from current and former employees—often the people who best know its vulnerabilities and its proprietary secrets.

Further resource: Listen to Erika Todd discuss legal concerns for freelancers with fulltime jobs on The Freelance Mindset Studio podcast here.

Coming up: The next article in this series will discuss key issues to know about creating incentive compensation plans—including the risks of a casual or ambiguous arrangements and triggers for tax penalties.

This article is not legal advice. If you are interested in discussing any of these topics further, please contact a member of the Employment & Benefits Practice Group.