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Small Companies Absolutely Need Non-Compete Agreements

Finding the right employees can make a big difference in the success of a small business but loosing the right employee can completely devastate a small company. It may be that a non-compete agreement is the last thing small businesses want since keeping expenses low is vital to their business. Perhaps, the family-like culture is preventing them from considering a non-compete agreement. Or maybe, it’s because they have only a handful of employees, so why bother with the aggravation. Lets be honest, hiring a lawyer is expensive and rumor is that non-competes don’t work without a lawyer involved. However, investing in a non-compete agreement can protect against litigation as well as protect the value of their small business in the event of a future merger or acquisition. There are many situations where a non-compete agreement can be an asset.

In some respects, you owe your employee a non-compete so that they understand what you expect from them while they work for you. Generally, a non-compete agreement prohibits an employee from competing directly with their employer during and after the employee’s employment. This direct competition can be a case where an employee takes a position with a competitor or an employee decides to start a business in the same market. In most instances, a non-compete agreement can include a defined geographic location, a specific period of time and even the restriction of specific competitive actions. Generally, the more specific a non-compete is, the better it works.

One valid reason to consider a non-compete agreement as a small business owner is to protect the confidentiality of information. Non-compete agreements are not just about protecting trade secrets. The agreement can address a company’s patents, copyrights, future sales, product schematics for engineering, manufacturing and production methods. Employees, who agree not to disclose such information to other competitors, in any form, can mitigate the risks against a small business.

Does the small business protect the financial data of its customers? Someone once said the single most valuable commodity is information. Clients trust businesses with their financial information. Naturally, this trust extends to anyone they employ. Mishandling or stealing financial data, such as credit card information, sales contracts, etc., not only puts a company’s reputation at risk, but can be a crime and an unexpected cost to their business. A non-compete agreement can help reduce risk, keep costs down and most importantly, retain the confidence of their customers who share their most vital information.

A non-compete is advantageous during the hiring and onboarding phases of the employer/employee relationship. A non-compete agreement sets the tone and identifies employee expectations when it comes to their positions and how they handle client relationships, client information, product data, and company plans. Not only can it address how they should conduct themselves as employees, but it can explain the restrictions and the risks that come with disclosing confidential information regardless of the environment such as during business hours or off-site at a convention.  

Can any small business afford to lose clients? Another benefit to a non-compete agreement is the added assurance it provides when there are only a few employees who handle propriety client information. As mentioned previously, a non-compete agreement can mitigate risks if a valued employee gives notice and takes valued clients with them. For example, employees with company roles in sales may be asked to sign a non-compete agreement to keep them from taking customers to their new position with a competing firm. Small business owners can also reduce the cost of litigation by stating in the agreement that the employee is responsible for all litigation costs should a breach of contract occur.

Just like any large company, small businesses need to protect their investments. One of the biggest investments, for any business, is employee training. No business owner likes to take the time and expense of training new employees just to watch the competition persuade them to walk away. For this reason, a non-compete agreement protects your investment in employee training, specifically if the training is highly specialized. This is the area where you really need an attorney to focus.  A generic or borrowed agreement will never be enforced against an employee. 

Small businesses benefit when employees understand the rules dictating their role within the company. With a non-compete agreement there can be no ambiguous conversations after the fact, no misunderstandings and far less complications. For instance, do employees understand those patents, schematics and other information with which they work with or that the employee creates during working hours are to be left behind should they choose to leave for another job? Do employees understand that the relationships, both current and those newly acquired by them, belong to the company? Creating a non-compete agreement can influence an employee’s conduct for the better, and give small businesses the protection they need when a valued employee resigns. Certainly, it’s best to simplify and state directly the expectations required before obstacles emerge.

Certainly, not all of the reasons for a non-compete agreement are obvious. But, at the end of the day, small business owners have legitimate business interests to protect. As long as the agreement is customized and meets the definition for  “reasonable” in scope and duration, and applies to personnel who actually encounter confidential information in their company role, a non-compete agreement can protect their business interests and prevent loss and risk to their future operations.

The Lynch Law Firm offers a customized approach to delivering non-compete agreements.  Specifically, Susan Word, HR Specialist, engages with the company to understand the unique needs and protectable assets of the small business.  After Susan has done much of the heavy lifting, Attorney Natalie Lynch, reviews the work for legal appropriateness. In this way, smaller companies are able to get the protection they need at a more palatable price.