Adventures in Entrepreneurship

Non-competition agreements have been standard for many trades throughout the capitalistic history. However, at some point California, being an at will employment state ceased to recognize these documents as binding. The logic is that an employer should no be able to restrict a person from taking a traded they know and using their skills at another company. Equally this applies to employees starting their own firms. How many of us have been apprenticed by another, perhaps even working as an employee at their firm.

While the business logic for a NCA is apparent, so does it logic for why California does not enforce these agreements.

So what is an employer of contract services to do to prevent employees from stealing clients from their former employer? There are a couple of things:

First thing is to make your clients a raving fan of your company, it’s model and brand. Your company brand should be disassociated from individuals likes – yes, they should love your people and have a great working relationship with them; however they should love what the company brings to them even more. Beyond simply avoiding problems with former employees, or even simply because of great customer service; this can make it much easier to exit your company (sell, merge, etc) when the time comes.

Next, market your customers with the value of a larger company (or simply larger than an independent contractor) – such as greater stability, higher availability, diverse skill sets, etc.

Third, remind your staff of the high costs of doing business, the value you provide to them: job and income stability, benefits, holiday and vacations (even if unpaid, they have a job to come back to – try taking a 2 week vacation from your contract clients without problems), administrative and business services — they can simply focus on their trade instead of the business end of things.

Finally, you can bind your clients in their contracts to not recruit, hire or retain your employees, former employees or contractors during the duration of their contract with you, and perhaps 1 year thereafter. This can simply be placed in line with your regular contract terms, but you also want to include two important elements: (1) a stated minimum monetary amount (we placed it at 50% of the annual salary of their regular technician) and (2) a provision for you to receive reasonable attorney fees. Most clients will understand this in the onset of an agreement. You can also gently remind your employees about it – in a non-threatening way.

Now failing all of these, you can likely litigate with your former employees because they’ll likely violate terms of their non-disclosure agreements. But proving this and determining a monetary damages could be difficult.

Realize that this does not prevent this from happening, but rather it is a big deterrent. You also still need to collect from them, which will take much longer than you would expect. With major clients this could be devastating to a company. What would happen if your employee was able to woo your largest client away? How would this affect your business if you could not collect any monetary damages from anyone for 24 months?

We recommend being proactive by making sure that your clients are happy and fiercely loyal. Second to that is having your contacts reviewed by a business trial lawyer.

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This is not intended to be specific legal advise, but general information and a guide to help you work with your professional team including lawyers to provide the correct amount of protection for your company. This is part of a 4 week series which came out of a luncheon discussion with several close business associates of mine.