A manager's guide to employment contracts

HR Magazine,  May, 1996  by Theresa Donahue Egler

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NONCOMPETE PROVISIONS

In addition to a confidentiality clause, employers may find it desirable, even necessary, to include a noncompete clause in employment agreements. Noncompete clauses prevent employees from competing with the company or soliciting its customers for a period of time. Such clauses are particularly important for employees who, by virtue of their jobs, gain knowledge of customer requirements or an introduction to the company's customers that puts them in a position to steal those customers. Be aware that the enforceability of noncompete clauses is governed by state laws that vary dramatically.

Noncompete agreements should not be used for just any employee. They should be reserved for higher-level employees who have access to the company's customers or highly sensitive information. Even where recognized under state law, such agreements are only enforced when the employer has a "protectible interest" at stake, and then only to the extent necessary to protect that interest. The employer must be able to demonstrate that the noncompete agreement is needed to protect trade secrets, confidential customer lists, or other legitimate proprietary information.

Noncompete clauses are more likely to be enforced if they are carefully tailored to the circumstances. As a general rule, noncompete clauses must be reasonable in geographic scope and time limitations. In many states, the courts will protect employers' legitimate interests, but not to an extent that deprives individuals of their livelihood.

For example, most courts would not enforce a clause against an in-state computer salesperson that prohibits him or her from working in sales anywhere in the United States for 10 years after terminating employment. A more reasonable clause would preclude the individual from selling computers in the state for two years after leaving the company. State laws vary on this issue, so employers should consult counsel about including noncompete clauses in their employment agreements.

Employers should also include a certification by the employee that he or she is not restricted from working for the employer. The certification provides evidence that the employee is not under any obligation, such as a noncompete agreement, to a former employer. The clause should require prospective employees who were subject to a previous noncompete agreement to provide a copy of the agreement to the new employer, with a representation that the agreement will not be violated by the work the employee will be performing. These provisions will help avoid hiring an employee who is under such restrictions and can protect against legal claims the employee's former employer could make.

BOILERPLATE CLAUSES

Finally, there are some standard clauses that should be included in all employment agreements. Because employment agreements are governed by state law, a company with facilities in multiple states may have to contend with multiple interpretations of the same agreement. A choice-of-law provision designates that the laws of a particular state will be used to interpret the particular contract.