Employee turnover is an inevitable byproduct of a thriving market economy and, notwithstanding the sluggish growth of the last five years, remains the trend in America. If you plan to start a small business with employees, you will do well to appreciate the hard reality that your employees’ motivation has less to do with working for your company as it does with using your company as a springboard to make more money with someone else’s company.
Or their own company.
If you’re starting a small business with employees, this is a significant challenge. For a variety of reasons, closely held businesses are especially vulnerable to the effects of employee turnover. First, you probably don’t have a division of HR professionals who can handle turnover on autopilot. So every lost worker is expensive and time consuming.
Second, and by far most important, your employees can easily exploit your most invaluable assets—client lists, trade secrets, and brand reputation.
So a popular defensive tool for the small-business owner is the noncompete agreement. For one thing, the employee has almost no bargaining leverage here. Can you imagine witnessing a prospective employee arguing against including a noncompete agreement? I can’t imagine that interview ending well! And, not surprisingly, employers routinely draft the most far-reaching noncompete agreements. A clause such as the following is hardly uncommon:
“Employee covenants with Company not to engage in any act that in the judgment of Company would be competitive with Company.”
In the mind of many small-business owners, this clause would be ideal. But, unfortunately for them, this clause would be completely unenforceable in Arkansas. Your contract would have been equally effective had it read: “Employee, feel free to exploit each and every one of my most critical trade secrets and make a fortune at my expense doing so.”
Limitations on Noncompete Agreements
Two things about Arkansas law make covenants not to compete uniquely precarious: the requirements of an enforceable covenant are vague and the consequences of failure to meet the requirements are extreme. According to the Supreme Court of Arkansas, covenants not to compete must (1) be reasonable in geographic proximity; (2) be reasonable in duration; and (3) not be more expansive than necessary to protect the respective business’s legitimate interests. If you find those requirements less than clear, join the club.
But the difficulty is just beginning. If the court finds that your noncompete agreement fails any requirement, the Supreme Court has said that courts will not revise a noncompete agreement to make it enforceable. So, for example, if the court looked at your three-year restriction and decided that only two years was reasonable, the court would not revise the agreement to two years; the whole agreement would be stricken from contract.
And your business secrets would be fair game.
This is where hiring an attorney is especially helpful. There is no shortage of Arkansas caselaw on this topic, because no two businesses are the same (except, of course, when your employee steals your business model). So drafting an enforceable covenant not to compete requires a working knowledge of the many covenants that have been upheld or struck down by Arkansas courts.
As part of the contract-drafting process, I spend considerable time acquainting myself the my clients’ businesses in order to draft the most restrictive, yet enforceable noncompete agreements possible. I want to know at least the following:
- The time and expense of developing the client’s product or service
- The available of the information needed to develop the product or service
- The client’s current geographic market
- The client’s competitors
- The employee’s responsibilities
- The employee’s access to trade secrets and client lists
- The brand’s market penetration
- Any means by which the employee’s access to sensitive information can be limited
- The degree to which your noncompete agreement would effectively restrict your employee from any employment upon termination
There are many important parts of a well-drafted employment agreement, and noncompete agreements are merely one such part. I hope this article impresses upon employers the need to carefully draft noncompete agreements and to consult with a business law attorney before including one.
For more information about a noncompete agreement or consulting an attorney, contact the Linville Johnson