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Non-compete agreements: not just for big business

Think your business is too small for non-compete agreements? Well, think again.

Small business owners can have much to gain from the protection of non-compete agreements. For starters, a well-crafted non-compete agreement offers benefits even if you never have to enforce it. An agreement can prevent problems before they happen by raising awareness among employees and some contractors that certain activities are off-limits while they’re working for you—or for a period of time after they leave your business.

“No matter what your size, if your business has customer information, a trade secret, or a unique process or product to protect, then you should think about a non-compete agreement,” says Elizabeth Milito, senior executive counsel with the National Federation of Independent Business.

“Loyal customers are the lifeblood of a small business and you want to do all you can to protect that,” Milito says.

The benefits of non-compete agreements

Being proactive regarding non-compete agreements is so important because it’s ensuring your employees and some contractors know what your ground rules are. Specifically, a solid non-compete agreement:

  • Clearly lays out expectations for employees.
  • Serves as a deterrent for an employee who might be thinking about leaving and taking other employees, customers, or proprietary information with them.
  • Protects you and also your customers who trust you to keep their information confidential.

When assessing whether non-compete agreements make sense for your business, here are some key considerations:

Take a proactive approach to non-compete agreements

Too often, a business owner realizes they need a non-compete agreement after the fact.

“It’s only after that experienced hairstylist walks out the door, that the business owner thinks ‘you know, I should probably think about a non-compete.’” Milito says. “But it’s too late to stop that stylist from going to a competing salon across the street and taking all her clients with her.”

A proactive approach would have stated what is off-limits if they leave. Once you have worked with a lawyer (see next section) to develop a non-compete agreement, it should be reviewed and signed by new employees and contractors who may have access to customer or proprietary information or processes. The process can be trickier with existing employees who may be taken aback by the request. Milito says you can soften the blow by taking the time to explain to employees your rationale for the non-compete agreement and answering any questions they may have.

Seek the advice of a local small business lawyer

Sure, you can download a non-compete agreement template from the internet. And maybe it will hold up in court. But maybe not. When it comes to small business non-competes, legal counsel is a sound investment. Across the country, courts are viewing non-compete agreements with increased scrutiny so an experienced small business lawyer can help assure the agreement is air-tight. In addition, several states in recent years have enacted laws that have been designed, in varying degrees, to limit non-compete agreements, including California, Illinois, and Nevada. Other states are currently considering limiting non-compete agreements, so it’s best to do some research and check with your lawyer before developing non-compete agreements.

Milito recommends using a local lawyer because what may be considered reasonable in one area might not be somewhere else. For instance, a court may view a restriction prohibiting an employee from opening a competing dry cleaner within a 3-mile radius justifiable in a small town. Yet in dense New York City, that would surely be deemed overly restrictive.

Pay close attention to details

When it comes to non-competes, the details matter. The broader you make a non-compete, the less likely it will hold up.

Beyond the geographic considerations, you want to focus the agreement on information and data that is unique or proprietary to your business. For instance, if you own a restaurant, the family-recipe marinara sauce could be protected.

“But it absolutely has to be the secret sauce,” Milito says. “And even if it is, if you offer that recipe in a cookbook you sell at the front counter, then you can’t expect that to hold up if a former employee starts using a similar recipe at a competing restaurant.”

Non-complete considerations for contractors

As a business owner, you should be selective when considering non-compete agreements for contractors. In particular, you want to be sure that any agreement isn’t so restrictive that it makes it appear that a contractor is operating as one of your employees instead of as an independent contractor, which can open you up to a host of legal issues. Make sure that any contractor you are asking to sign a non-compete is working for other clients as well, and that there is a sound reason for the agreement.

“So, you wouldn’t want a non-compete for the plumber that fixes a leaky pipe at your restaurant. But you might want one for the marketing consultant who has access to your customers’ email addresses to send out the weekly specials and promotional materials,” notes Milito.

Protect what you’ve built

You’ve worked hard to build your small business and gain the loyalty and trust of your customers. Considering non-compete agreements can help make sure that all that hard work doesn’t walk out your front door one day.

This information is provided for informational purposes, may not be applicable to all situations, and is not intended to provide legal, tax, or financial advice. For specific advice about your unique circumstances, you may wish to consult a qualified professional.