Published on March 25th, 2004 by Alan L Sklover
ACTUAL CASE HISTORY: Rosemary, 51, a Senior Trader at a large commodity firm, had been on the job for 9 years. One day a memo came in from Human Resources about the company’s new stock option plan. To her surprise, she was among those “valued employees who were being offered a goodly number of stock options, as a reward for long-term service and loyalty. She was elated; she felt that “at long last, I’m being recognized for my contribution.” When the papers arrived for her signature, Rosemary took them home, and as always, had her brother-in-law, an attorney give them a once-over.
Her brother-in-law told her the papers were just fine, but one thing did bother him: on page 47 of the stock option plan, it said words to the effect “By signing this stock option agreement, you are promising that, should your employment with the company end for any reason, you will not work for a competing firm for a period of twelve months.” That is, buried within the stock option plan was a non-compete agreement.
Rosemary gave the matter some thought, but decided that the chances of her leaving the company were far-fetched. “Anyway,” she thought, “everyone knows these things aren’t enforceable.” She signed, and looked forward to the options being vested in two years.
Eight months later, Rosemary’s company merged with its direct competitor. The competitor had two Senior Traders who already covered Rosemary’s area of expertise, and she was let go. When she landed a job at a smaller competitor, she didn’t give the non-compete a moment’s thought. Three weeks later, she was called into Human Resources, shown a “cease and desist” letter the new employer had received, and asked to leave. She was told, “It’s not that we don’t like your work, or that we think this is fair, but we don’t want to get involved in a lawsuit, and our attorneys tell us that’s a risk. We’re so very sorry.”
Rosemary was out of work for 14 months. She never received the benefits of those stock options. But she sure paid a price for them.
LESSON TO BE LEARNED: Freedom is a precious commodity…especially yours. Your ability to work for whom you want, doing what you want, and where you want, should not be given away capriciously. In the increasingly competitive marketplace for the valuable skills, knowledge and contacts of executive employees – what we call “unique human capital” – employers are trying more and more to take away your precious freedom to work for their competitors.
WHAT YOU SHOULD DO: If you’re asked to sign a “non-compete” agreement, by either a present or a prospective employer, you should consider the following:
- You must presume two things: first, that the restriction is enforceable. Don’t let anyone tell you they are not enforceable; most are. Second, presume that your future circumstances will be such that the restriction will burden you. You may be denied the opportunity of a lifetime because you’ve signed such an agreement.
- Non-compete agreements generally have three components: (a) the activities you cannot engage in, (b) the length of time you’re restricted, (c) the geography applicable. Try requesting reasonable limits on each. For example, if your present employer sells brushes to XYZ Corp., you should not be restricted from selling bookkeeping services to XYZ Corp.
- Surely, if you don’t resign, but are one day involuntarily terminated, the non-compete should be expressly void: that is, if your company doesn’t want you, your company shouldn’t fear your working for competitors. This is particularly applicable to downsizings and restructurings. Ask that the provisions clearly state this.
- If the requested restriction is central to your career (for example, you cannot practice your specialty anywhere in your state, consider requesting that your compensation and benefits be continued during any restriction period while you remain unemployed.
- Consider the adage, “Just Say No.” Non-compete agreements may represent that much of a career risk that, without reasonable limits, the job may not be worth the risk. If you’re truly considered valuable, or even irreplaceable, your employer may just back down and withdraw the request that you sign the non-compete.
- Anything lost in negotiation can later be retrieved in re-negotiation. If you should later develop greater negotiation leverage, try to restrict or remove the agreement again.
- Non-compete agreements have “cousins.” You may also be asked to sign similar, but different agreements, including a promise that you won’t ask staff to move to another employer (non-solicitation of staff), or promise that you won’t disclose any information about the company (non-disclosure). These are usually less burdensome, but may still cause difficulties in a next job.
- Lastly, always keep a copy. These days many prospective future employers will likely ask you whether you’ve signed such an agreement; you must be upfront. Let them review your non-compete, if they ask. In fact, it may be wise to request that they do so. Better no new job than a new job that lasts only two weeks, especially if your integrity is called into question as a result.
If you would like to obtain a “model” memo to help you respond to
a request that you sign a “non-compete” agreement [click here].
We also offer a 185-Point Master Guide and Checklist for Non-Competes, which includes (a) understanding, (b) negotiating, and (c) defending yourself against, a non-compete agreement. If you’d like to obtain a copy, just [click here].