4 Critical Factors to Consider with Non-compete Agreements
Categories: Hiring & Onboarding, Human Element
One major goal of a healthy financial advisor business is growth over time. Creating healthy growth often means building a larger group of professionals to bring in and handle the business.
As the owner, after searching and evaluating good candidates, you bring in new advisors, train them, introduce them to your clients, and encourage them to establish and build their own relationships. Your objective is to allow your new advisors to develop so that they in turn will contribute to the long-term viability of your firm.
But what happens when one of those bright rising stars decides to take what she has learned from you, including your client list, and open up a competing advisor firm across the street?
You might think the answer is simple: have your advisors sign a non-compete agreement. You will then be completely protected, right? Unfortunately, the answer is often “not really”, “probably not”, or even “actually, not at all.”
Inconsistent Laws from State to State
Non-compete agreements can be tricky, because this is an area of the law that has generated a variety of approaches in different states. Some states are generally pro-employer and permit these kinds of agreements on a fairly broad basis. Others are much more restrictive. And some states, such as California, almost never allow these kinds of agreements.
Even where these agreements are permitted, they should be prepared by an attorney with detailed knowledge of the law of the particular state dealing with these issues.
Getting Signatures? It’s all in the Timing.
Another important factor to consider is the timing of having your employees sign such an agreement. I have had clients in the past wait until the employee has left before coming to me to ask for help. Often, they are too late. These agreements stand the greatest chance of being enforceable when they are signed at the beginning of the employment relationship.
Some states limit the ability of employers to request that existing employees sign such an agreement in order to remain employed. You might have to pay special bonuses or promote the employee to provide sufficient “consideration” under the law.
Protecting your “Secret Sauce”
As for your client lists and any proprietary formulas or processes, these are generally entitled to pretty strong protection as trade secrets – as long as you take the necessary steps to protect them. You need to make sure you get knowledgeable advice on this as well, because once information that was a trade secret is let out into the open, future protection is extremely difficult if not impossible.
Ditch the Template for Maximum Protection
There are no simple answers here – no cookie cutter off-the-shelf templates that can simply be cut and pasted along with the employee’s name. When litigated, courts evaluate these agreements based on all the facts and circumstances related to the employee and his or her relationship with your firm and the clients.
Proper drafting of such an agreement up front requires the same kind of evaluation of the facts and circumstances, including the territorial extent of the agreement, the types of activity to be restricted, and the scope of the employee’s duties. All of these need to be considered in light of the state’s rules on what is necessary for such agreements to be reasonable and enforceable.
The Bottom Line
As a business owner, you can and should take steps to protect your legitimate business interests. As with most things, doing so up-front on a pro-active basis is the most successful approach.
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