June 2, 2009

Gotcha: The Non-compete agreement

Filed under: For Managers, Hiring, Interviewing, Making money

Employers have an edge today when they’re hiring. More people are out of work. So employers up the ante and bargain harder. More companies are insisting that people sign non-compete agreements (NCAs) before they’ll hire them. An NCA protects a company from you after you leave because it restricts where you can work, what kind of work you can do, and who you can work for. It protects the company from competition.

Desperate for a job — or just because they’re in a hurry to close a deal –, people sign NCAs without realizing the consequences. An NCA could shatter your career plans by literally restricting you from the jobs you want.

Computerworld‘s article last week, Don’t sign away your future, is one of the best career pieces the mag has done. (The date on the article on the website is April 23, 2009, but it appears in the May 25 edition of the magazine.) It discusses six tips to protect your career. Don’t miss it.

What the article doesn’t discuss is how goofy employers are — and what they get away with. For example, usually only top-level executives get employment contracts that define terms and obligations between the employee and the employer. These agreements protect both parties. Companies won’t give these agreements to lower level workers.

But employers routinely demand that employees at almost any level sign one-sided, restrictive covenants that benefit only the employer. NCA’s are an example. And herein lies the negotiating tactic you should use when an employer asks you to sign a restrictive NCA before giving you a job offer. Your objective is to get compensated for signing an NCA, just like a top-level executive — or to avoid the NCA altogether. Try this:

  • Ask whether the company will negotiate a comprehensive, written employment contract with  you. Unless you’re an exec, they will say no.
  • Respond that you don’t understand why, if they won’t sign a mutual pact, they are asking you to sign an agreement that protects only the company.
  • After they offer a mindless “this is our policy” explanation, tell them you’d be glad to consider an NCA if they will reciprocate by agreeing to terms that will compensate you for what you’d be giving up if you sign the NCA.

“If I can’t work in this industry or in this region or on certain products, that will cost me money. I’d be glad to consider giving you such a covenant, but I need to know what you will give me in return. I’m sure we could negotiate reasonable terms.”

The only legitimate answer to a request to sign an NCA is an employment contract that pays you severance (or something similar) during the period you agree not to compete with the company. In other words, the company should agree to keep you on the payroll while it benefits from avoiding competition with you. This is common with top execs. Such a deal is often termed “severance” or a “consulting contract,” during which time the exec basically just collects a check until he’s free to get his next job.

If the company won’t agree to a mutually-beneficial covenant, then smile and tell them you just don’t see why you should risk your future income (and career) by signing a one-sided contract. Do this only if you have the brass. It could cost you the job. On the other hand, signing the NCA could cost you your next job.

My buddy and attorney Bernie Dietz suggests that regarding Employment Contracts: Everyone needs promise protection, not just top execs. I agree.

If you’re a manager and you’re hiring people, and you need them to sign an NCA, consider that you’re asking for something that has significant financial value. Don’t expect something for nothing. Pay for what you’re getting.

If you’re a job applicant, and you’re going to give up future income because an employer wants to be protected from you, then negotiate compensation for the restrictions you’ll accept. Otherwise, it’s probably not a good deal — no matter how desperate you are. If the company agrees to do an employment contract, invest a few bucks in a good lawyer to make sure the thing is really mutually beneficial.

20 Comments on “Gotcha: The Non-compete agreement”
By Nick Corcodilos
June 2, 2009 at 1:14 pm

IBM has sued Dell for hiring an M&A manager who had signed an NCA with IBM.

This non-compete litigation will be instructive to watch:
http://www.informationweek.com/news/showArticle.jhtml?articleID=217700367

By Matt
June 2, 2009 at 1:22 pm

I was told by a labor lawyer (one who represents the corporate side, not the labor side) that NCAs are really difficult (almost prohibitively so) to enforce below the exec level, because its difficult to make the case to prevent someone from earning a living (in their field of work in the proximity of their home), and if it went to a jury trail, the former employee would almost certainly win. I wonder if that’s still the case, or if the legal climate is changing?

I suspect that most NCAs also has some “third-party” mediation clause to keep it out of the courts, for that reason. Perhaps editing the clause to allow the case to go to the courts would make signing the NCA a non-issue?

By TomG in TX
June 6, 2009 at 5:32 pm

The NCA may be hard to enforce, but you would probably spend about a year’s salary defending yourself against one.

By Streetcar Eddie
June 9, 2009 at 7:52 am

Years ago I got a package to read print out and sign to bring to the final interview — by email — So with the help of a lawyer friend I tweaked the language more suitable for me and printed it out and signed, It was countersigned by the HR jokey without reading, and it resides in the corporate files somewhere. Someday it will give me an opportunity to enforce the terms. Wait till the hornet stings back.

By G
June 9, 2009 at 9:41 am

Do we have any examples of middle-level people who have re-negotiated or refused to sign a non-compete? Did any of them get the job?

My experience is that the non-compete wording comes down from the corporate office and you can either refuse it and the job or accept it and the job while hoping it will be un-enforceable.

I have refused to sign a truly shocking and completely un-enforceable non-compete, which lost me the job offer. Note that I first requested the most shocking clause to be removed and was refused. I don’t regret it since the company was obviously run by idiots incapable of writing an enforceable agreement, but I might feel differently in today’s job market.

Does anyone have any examples of a mid-level person who successfully resisted the corporate non-compete in any way? And got the job?

By Harold
June 9, 2009 at 9:46 am

Matt: What that corporate labor lawyer didn’t mention is the “chilling effect” such an NCA can have, and I’ve seen that happen. Sure, you’re likely to win if it demands too much, but what company thinking of hiring you would want the hassle?

At least for smaller companies most don’t have an arbitration provision, and those aren’t worth very much to the individual, they seldom win and for a company thinking of hiring you, that’s just another layer of uncertainty.

Final comment: as I understand it, except in rare circumstances they are unenforceable in California. I and many others think that has more than a little to do with Silicon Valley’s near half-century run as a high tech center.

By Nick Corcodilos
June 9, 2009 at 11:01 am

Eddie,

Your story does not surprise me. It suggests that HR regards NCA’s as just another routine form. I believe NCA’s at most companies are mindless – they’re “copied” by HR from some HR association’s store of boilerplate documents. They don’t like negotiating them because they didn’t write them and don’t understand them, and don’t want to spend legal fees to correct them.

Your solution is a good one. I wonder how many personnel jockeys would just take a signed, revised doc and file it like that? Probably most. Caveat emptor.

By Nick Corcodilos
June 9, 2009 at 11:06 am

G,

I’ve had candidates work with my clients to revise NCA’s. The more quietly you do it, the more likely to get it done. What employers worry about is word getting out that they revised the NCA for one person. That would lead to requests for changes by employees.

I’m an example of someone who refused to sign an NCA while I was an employee of a company. My employer was acquired by a bigger company. HR demanded that all managers sign an NCA. Mind you, these were people who ALREADY were employees. I ignored it each time it arrived in inter-office mail. (E-mail was nascent then.) Finally I started getting calls from HR wanting to know when I was going to sign it. I kept telling them my lawyer was still reviewing it. Would the company’s lawyer have time to discuss it with my lawyer? Now we were talking legal fees for the company. Managers around me told me I’d get fired. They were stunned. I never signed it, no matter how many times HR asked. What were they going to do, fire me? I suppose they could have. A year or so later I quit because the company was so poorly managed.

I have never signed any kind of NCA. I never will. The answer to an NCA is to request that the company sign a severance package that compensates you for lost income due to the restriction the NCA imposes. That’s only fair. I won’t compete with you, but you have to pay me to stay out of your market, okay?

By TomG in TX
June 9, 2009 at 11:55 am

Once I applied for a contract postion as a bottom-of-the-totem-pole software engineer, in which I would be employed by ContractCo and work at GiantCo. I told ContractCo’s recruiter in our first conversation that my long-term goal was to work at GiantCo as a direct employee, and I did not want to sign anything that would restrict my ability to work for GiantCo. He said no problem.

I interviewed with ContractCo and GiantCo and they liked me. Then I got the employment agreement from ContractCo. It had a very strict non-compete clause. For 1 year after my contract ended, I could not work for GiantCo or (get this) any other company at which ContractCo had placed employees. They would not provide me with a list of those companies, but from their web site it seemed that they placed employees at most of the large employers in this area. And this was a 3-month contract.

There was also a No Solicitation clause that, if I read it correctly, forbade me from having any contact with any employee at GiantCo for 1 year after my contract ended.

There was a clause stating that any litigation to enforce the agreement had to take place in ContractCo’s home state.

There was a special provision for those of you who would sign the agreement thinking it is unenforceable. The agreement had a clause stating that you think the agreement is “fair” or somesuch. It would be hard to go to court then and argue that you think the agreement is unfair.

Both the offer letter and the agreement stated that the agreement superseded any previous written or oral agreements. So everything the recruiter told me over the phone was, to put it charitably, insignificant.

I asked that the questionable parts of the agreement be changed to match what the recruiter said in the phone calls. The only thing he would change would be to change the 1-year period to 3 months.

I declined the job offer. The recruiter asked me why. I told him it was because of the agreement.

By justice 4 you
June 9, 2009 at 12:38 pm

Glad to see all the dumb employer tricks with NCA’s that fellow readers have posted.

Thus I’m inspired to give a related contract signing story.

My divorce attorney had buried in their representation contract a clause that allowed them to AUTOMATICALLY bill your credit card for outstanding balances.

This would potentially cause issues for many reasons so I simply lined out the offending sentence in that section, returned it to the secretary and kept my mouth shut.

As you would imagine, there was a billing dispute that the attorney refused to be fair about.

So…imagine their surprise when they discovered that any attempts to bully me by unilaterally charging my card would be FRAUD!

So I agree with many comments above. Read the NCA, bring up questions, attempt to negotiate and “walk” if you’re being taken advantage of.

By G
June 9, 2009 at 1:47 pm

Nick, I once had a situation like that where the company tried to get all the existing employees to sign a new non-compete. One employee refused and was fired. (He should have used your “I’m still consulting my lawyer” line instead of outright refusing.) I noticed the agreement was a Word document to be faxed back so I edited it to say what it should have said and faxed it back. They never noticed, which gave me time to find a new job.

I wonder how it would work, when offered a new job with a non-compete, to offer “I’m still consulting my lawyer” or “Can we schedule a meeting with my lawyer and the company’s lawyer” for a while. How many companies would eventually give up and how many would refuse to hire?

By 61 & Looking
June 16, 2009 at 5:32 pm

I wish I had this thread about three years ago. I unknowingly signed the company’s NCA without giving it much thought. I received it as an email and it was made clear that signing it was a ‘routine’ requirement of employment.

After leaving the company three years later I was offered a job at a competitor. My former employer sent me a threatening letter, which I took, along with the NCA to a sharp employment lawyer. He advised me to take heed as the arbitration would occur in a small town where the CEO had lived his whole life and was pals with the judge.

End result: the new employer withdrew my job offer, saying he didn’t want to play hardball with the former employer. This was four months ago.

As for me, I’m having a difficult time finding a new job. Being 61 makes it tough. Morale: heed the advice of this thread and be smart.

By Jeremy
June 30, 2009 at 8:22 pm

I am currently being pushed to sign a non-compete from my employer. I was brought on as a new GM, externally, four months ago. The NCA put in front of me lists a 1000 mile radius, and a three year time frame, with no provision to protect me. Thanks for the advice everyone. I’ve spoken to my attorney, and tomorrow I am suggesting SEVERAL changes to the document before I sign anything at all. I’ll post an update as to how it goes….

By Nick Corcodilos
June 30, 2009 at 9:13 pm

Jeremy,

Why didn’t they give you the NCA when they hired you? Seems pretty odd to me that just 4 months later they hit you with this.

My advice: Have an attorney review it and advise you. Use that to buy you some time. If they’re gonna spring this so suddenly, they should undestand that you need time to consult a lawyer. If they say “it’s no big deal” then I’d smile and say, “so why are we doing this?”

By shoba
September 10, 2009 at 1:41 pm

I am an individual software consultant and I signed a non-competant agreement with a recruting company A. The company A said its going to place me with a client B.
The agreement says I cannot work for client B for 1 yr after completing my employment with the client B. I signed this agreement without any job offer letter from the client B or Company A.

So my question is without any real job offer, is the non compete agreement valid? There is no start date of employment on the agreement. Meanwhile another recruiting company is ready to place me with the client B. Is it legally permissible to join the client B through another recruiting company.

I have never been employed by this company A before and I dont have any job offers from them. But they made me sign the agreement saying its just a usual procedure before submitting me to the client. Also in the agreement whenever it specifies me, it says as a consultant. It doesn’t use the word employee. So am I bound to this agreement as an individual consultant even though I am not an employee of that company.
Thanks in advance.

By bazza
November 27, 2009 at 11:07 pm

I began volunteering at a store two days a week and then I began working three days a week with pay. The majority of the time that I spent in the store, I was sorting and pricing items, creating sales, greeting customers and organizing their business so that it would be a better environment for them and their customers. In the last couple of days there was a difference of opinion between the owners and myself and I chose to terminate my employment.

These employers are now requesting that I sign a non-compete document. Is this legal and do I need to sign it? They are choosing to withhold wages that are owed to me if I do not sign the requested document, even though I have terminated employment with them.

Thank you.

By Nick Corcodilos
November 29, 2009 at 7:34 pm

@bazza: I’m not a lawyer and this is not legal advice. What you’re experiencing is not uncommon: An employer tries to get an NCA signed when an employee quits. That’s nuts! My advice: Contact your state department of labor and employment. Ask them your question. My guess is that if you do not sign the NCA, your employer would be in violation of state law if it doesn’t pay you wages you have already learned. Don’t be intimidated. I think your employer is trying to intimidate you. Talk to the state – get advice from those who are responsible for regulations. I’d love to know what comes of this. Hope it goes well.

By jason kelly
January 6, 2013 at 11:48 pm

I worked at fastenal in ontario oregon. I live in Payette idaho and i sighned my nca over a year after i started. I signed it 3 months after i got back from traing for my new position. Is it true it should of been offered at the time of the job offer or its not valid. Its also a nca from minnisota. I also want to know if i can volunteer at my friends business but its in the same field is that illegal. I never have recieved a paychech from this person or been on the pay roll.

By jason kelly
January 6, 2013 at 11:52 pm

I was also courius because my job position at fastenal ended. They no longer offed the outside sales position and he gave me no notice just showed up oneday and said you no longer have a job here. I have never been written up or had a reason for being let go. I know in oregon its not a right to work state like idaho and it is normally pretty hard to fire somone. Since this happend does it violate the nca and make it non active.

By Nick Corcodilos
January 7, 2013 at 10:45 am

@jason: These questions are best answered by an attorney, and if the potential earnings you’re talking about are significant, you should consider investing a few bucks in getting legal advice from a lawyer who understands Oregon labor law.

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