Staring Down a Non-Compete Clause

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Whether you’re an independent contractor who’s landed a great new project, or a new employee starting a full-time job, you might be tempted to sign whatever boilerplate contract is put in front of you.

Take John Doe (obviously not his real name, for reasons that will become clear in a bit), who worked onsite at a large company as an employee for a smaller business. He had signed a contract with a non-compete clause, which forbade him from taking a new job where he would compete with his employer. Before his first year on the job was up, his position was eliminated—but since he already had a relationship with a manager at the large company, he could work as an independent contractor for a new team.

Unfortunately, his new contracting gig with the large company competed directly with the position he’d previously occupied at the smaller business. Because he lived in an at-will state, he researched whether businesses could enforce non-compete clauses in his jurisdiction, and found conflicting results. So he decided to take a chance and maintain his contractor work.

Three months into the new gig, both he and his new employer received a cease-and-desist letter, complete with threat of lawsuit—even though his contracting work was very different from what he’d done in his previous position. (Whereas he’d formerly worked in project management, now he was an analyst.)

John Doe eventually signed a settlement agreement for thousands of dollars, which forced him to declare bankruptcy after making his first payment. Not only that, but the stress affected his work quality, and he was eventually let go from his new position. Since he was an independent contractor, he didn’t qualify for unemployment, and it took him months to find new work.

Now Doe recommends that job candidates attempt to strike out the non-compete clauses on their new contracts, or at least make sure the language is incredibly specific. But even focusing on the language, he points out, doesn’t prevent someone from interpreting it in a way detrimental to your interests: “The best bet is to just remove it altogether.”

He also recommends having someone who doesn’t work for the company—best of all, a lawyer—look at the contract agreement if you do not understand it: “If the company won’t let do that, then they’re predators, so just walk away.”

“[Non-compete clauses] were invented as a scalpel for very specific situations, in particular salespeople who would walk away with lists of clients and customers and try to compete against their employers in a very small geographic area,” suggested attorney Michele Grant, “but now they’re being used as a bludgeon in all different kinds of sectors of the environment, and it’s expanded in a way that is not fair to employees.”

While it’s true that some states, such as California, have laws preventing the enforcement of non-compete clauses, that doesn’t mean a company won’t still take a former employee or contractor to court. And since companies have the resources to hire expensive lawyers and spend more time in legal quagmires, negotiating ahead of time is the best way to protect yourself from signing an agreement that could harm your ability to work.

“Think of the worst case scenario: you start working for an organization and you find out after just a few weeks that it’s not very good fit, but you signed away your right to work for a year or two afterwards,” Grant said, pointing out that, even if agreements aren’t ultimately enforceable, getting sued is stressful, expensive, and time-consuming.

Even if a company doesn’t enforce its non-compete clause, signing one can still affect your behavior. “There’s sociological studies on the practices,” said Orly Lobel, a professor at the University of San Diego and author of Talent Wants to Be Free, “A lot of people think it won’t matter but it affects their behavior. They may lay low when they join a new workplace and sever their connections with previous work colleagues and don’t show up to professional associations and conferences. That in itself is a big cost.”

Having a non-compete clause in your contract may make you less likely to leave a job you’re unhappy with, or even to strike out on your own (if you have entrepreneurial inclinations).

Unfortunately, while some companies are happy to waive the non-compete clause in their contracts, others are unwilling to negotiate. In some cases, you’ll have to choose between signing the boilerplate contract or trying to find another company to work for.

In other cases, companies are okay with striking the non-compete clause, or at least agreeing to make the terms more specific. Just make sure you are clear on the risks before deciding whether or not to sign the dotted line.

Image Credit: Nonwarit/Shutterstock.com

Comments

10 Responses to “Staring Down a Non-Compete Clause”

November 19, 2015 at 9:07 am, Zachary Hamilton said:

I wish we had some more information on the incident in this story. It doesn’t seem reasonable that he would be held to a non-compete agreement if his position was eliminated. I would want to know how the non-compete clause applied if I was terminated – fired, laid off, or if I quit. Those are 3 very different situations, and each should be handled differently.

For me, if I quit, I can understand the non-compete clause applying for a period of time (perhaps 1 – 2 years). If I get laid off, it should not apply at all. If I get fired, well… that’s a little bit of a gray area. I would not want it to apply, but I can understand if the company wanted to hold the line on it.

It’s completely unreasonable to hold someone to a non-compete agreement if you lay them off due to position elimination or staff reductions.

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November 19, 2015 at 9:59 am, Greg T said:

With regard to modifying a contract, my favorite advice from a lawyer was the following:
(a). Scan contract into a digital document and edit contract as desired. In the case of a non-compete clause, either remove it or change the wording in your favor.
(b). Print, sign, and date the new contract and return to the other party. Usually the other party will not bother to read the edited contract, especially if document superficially appears to be unchanged (same page count, same font, same headings, etc.)
(c). I’ve used this technique several times for commercial leases and it has always worked. Never tried it for a non-compete clause, but I don’t know why it wouldn’t work. I really doubt that many Human Resource types are competent to double check a signed contract.

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November 19, 2015 at 10:31 am, Jason said:

Hard to know exactly what happened since the article is short on detail, but it sounds to me that he was working for a development firm or a staffing company on contract at a client firm to whom he was introduced. Perhaps, the department he was in at the client company had cutbacks, but another department had budget to add people. If this was the case, the non compete was reasonable. The client should have run his new contract through the original firm and there would not have been an issue. Its likely that the client firm also breached their contract as well.

Lastly the notion that an Analyst is “very different” from a PM as the article states is ridiculous. I am in the IT field and they are very similar. Many PMs are former Analysts and some handle both functions in one role.

I think this article is short on details and highly misleading to the reader. While most companies will not waive non compete clauses or any other key term, do not feel pressured to sign anything on the spot if you are not comfortable. In 99% of the cases, people act with integrity, and contracts never come out of the file cabinet after they are signed. The best advice is to consult an attorney if you are not sure.

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November 19, 2015 at 12:55 pm, Roger Stevens said:

Perhaps the article was vague in order to product the identity of the source. In any case, people do indeed get held to non-compete agreements even if their position is eliminated. That’s why it’s important to read or modify the contract. I have had success getting non-compete clauses waived and modified both as an independent contractor and as an employee. I think it is very bad advice to just sign a contract and hope for the best and would follow the advice in the post and consult an attorney.

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November 19, 2015 at 2:36 pm, Johnny said:

Every non-compete clause I’ve signed over the past few years for various I/T projects have basically outlined I would not circumvent “The Company” by soliciting employment or services to any client I rendered services to on behalf of the “The Company”. Nor would I solicit employees of “The Company” to leave. The time period has always been 12 months from the last date of employment. This wording seems pretty standard in my experience.

None of these clause have ever had any provision preventing me from doing similar work for other clients that “The Company” has no business with. I believe some states invalidate such clause if it prevents gainful employment.

If John Doe did have a “standard” non-compete clause, he was clearing in the wrong as was his employer at the large company he rendered services to.

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November 19, 2015 at 3:31 pm, Violet Weed said:

I don’t care what your ‘non compete’ says.
In the USofA you CANNOT SIGN AWAY YOUR RIGHTS TO WORK. I know. I SUED and WON a lawsuit against a major temp agency (back in the 80s) for that very thing. I had just moved back to Hawai’i and took a temp job as an ‘administrative assistant’ while I looked for a REAL job. The President of the client corp found out I was a programmer (because I told him) and after my temp role was up (couple of weeks) I took a job with them as a PROGRAMMER. The temp agency tried to stop me and/or collect a FEE because they had ‘presented’ me to the client. I SUED AND WON, based on the fact that I was hired to be a no-brain admin asst (I’m not nice, so sue me back), and THEN I SOLD MYSELF TO THE PRESIDENT OF THE CLIENT over lunch one day FOR A PROGRAMMING JOB.
THE FACT THAT I HAD A BROTHER WHO WAS A HIGH UP ELECTED GOVT OFFICIAL at the time (and an attorney, as usual for those high up roles) had NOTHING TO DO WITH my winning the lawsuit. THE FACT THAT YOU CANNOT SIGN AWAY YOUR RIGHTS AS AN AMERICAN CITIZEN TO FIND AND HOLD A JOB, was what won for me. DO NOT BE AFRAID TO DO WHAT IS INHERENTLY RIGHT FOR YOURSELF AND YOUR FAMILY. Too many people these days are chickensheeats. Don’t be one of them. FIGHT BACK. USA FOREVER!!! Our RIGHTS are why so many 3rd-world ppl want to come here.

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November 20, 2015 at 8:27 pm, Anonymous Poster said:

Unfortunately – you can sign away your rights to specific work – not general work. However, the work must be of a nature that allows the individual to provide irreparable harm to the a firm if used in a directly competing nature against a directly competing firm. Now, if we look at the famous insurance cases – there are not many insurance sales persons in rural North Dakota so the right to gainful employment trumpets loudest, but in a high rent district in say San Francisco its another story. For termination by firing – courts agree the firm saw the person as “worthless” to them so there is rarely attempt at enforcement. For termination by layoff/reduction – courts agree no claim unless suitable alternative employment was offered. That said, always, always, always request to remove a non-compete. Finally, the case above was most likely in favor of plaintiff due to the facts that a) the original position “contract” had been fulfilled in that capacity, b) they did not have the req for the programmer position, and c) because they had not presented you for the other position so they suffered no damages or potential damage and hence no awards. The rules of agency and property are a little obscure in this area, but I imagine that if they had held the req for the programmer position then they would have gone after the both you and the company which used to happen a lot when temp firms put admin assistants in a seat and then the employer offered them full-time and they took it and dropped the agency. This practice was reduced by buy-out clauses.

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November 25, 2015 at 12:19 pm, Anonymous said:

I was sued by my former employer and I won my non-compete as the employer cannot prevent a person from making a living here in Canada. However my former employer doesn’t want to concede the total suit as I suspect their afraid I will counter sue for compensation for damages after as I wasn’t able to work for a year and had spent $100,000 on lawyers fees and still adding up. My former employer had told other personnel in the community that he would do everything in his power to make myself go bankrupt and I would have if family haven’t helped myself out. Also the former employer is fighting on the stolen contacts that I had taken is what we disagreeing on now. Although I was in the industry for 25 years when I was hired and had 90 % of the contacts when I was hired. That was why I was hired due to my contacts. My non-compete was for five years, who can survive without work for five years? If I was to work for another employer in any work environment, I’d advise all employees not to sign a non-compete. All non-competes are for business owners when they sell their businesses not employees! Employers know the employees don’t have the funds to get a lawyer to fight back!

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November 29, 2015 at 9:17 pm, Anonymous said:

I am in a situation where I have been declined pay increases over the past two years, and yet I am unable to leave my employer due to non-compete clause. Do I have any options?

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December 01, 2015 at 1:27 pm, Dave Green said:

Enforcement of these non-compete clause often has little to do with anything real. You, somewhere in the company for which you worked, may have “stepped on someone’s toes”…or, there is a personnel (no, no – he or she in an organization as I envision for this would not be called a PRESONNEL manager – he or she would be a HUMAN RESOURCES manager; thus demeaning workers to nothing more than another RESOURCE to run through the corporate mill) manager who is on a permanent power trip and, as such, has an irrational hatred for anyone over whom he or she has authority and power.

I had signed one with a company for which I worked for several years….when I took the buyout, it was waved in my face….as it was written, it appeared to preclude me from ever working at my skill, trade, profession again for anyone no matter what sector or industry to which I went. It was opined to be unenforceable due to its broad and vague restrictions – but with a caveat – NOTHING WOULD PREVENT THEM FROM SUING ME IF THEY SO DESIRED!….and I would be on my own for paying for my defense.

I left the mining industry completely and severed all contacts with everyone with whom I was acquainted within that industry….I wanted no “leakage” of information about new endeavours to get back to my former employer.

Good luck to all of you.

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