KEEPING YOUR EMPLOYEES
AWAY FROM THE COMPETITIOn

By Erik W. Fox, Esq.

A critical issue facing employers today is employee retention. To paraphrase a point made by Warren Buffett, if you are in the professional services business, the real value of your company goes down the elevator every evening. If your employees are up for grabs, so is a good deal of your business. So how are we to protect ourselves? Covenants not to compete are legitimate tools a business can use to prevent key employees from defecting to competing organizations. But overstepping the letter of the law may make it unenforceable. Employers could even be fined. This may be a time where the limited expense of your lawyer’s advice might save you major operational and legal headaches.

What You Can Do

Any business in Nevada can enter into a written agreement with an employee that prohibits them from pursuing a similar competitive vocation or from disclosing trade secrets or business methods utilized by your business. Such agreements must be written, as state law actually allows for fines up to $5,000 against employers for restrictions on trade that are not spelled out in writing.

What You Have to Do

The covenant not to compete must also precisely spell out the nature and terms of the prospective employment. Just as important it should indicate why it is important that the employee be prohibited from post-employment competition.

It boils down to three essential elements. First, the agreement must be supported by valuable consideration. Second, a covenant not to compete must be reasonable in terms of duration. Third, it must be reasonable in terms of geographic scope.

Valuable consideration can be simply the employee accepting the offer of employment. It could also be offering a signing bonus or special training.

Limitations on the duration and geographic scope of post-employment restrictions must also be reasonable. Businesses should be realistic. Go no further than necessary or risk losing in court.

What a Business Should Not Do

Remember that by entering into post-employment restrictive agreements, businesses are engaging in a restriction on free trade. There are strong public policies against the restriction of free trade. In order to survive the judicial scrutiny of a covenant not to compete, a business must ensure that its proposed agreement is fair and meets the ambiguous standard of going no further than necessary.

For instance, in Nevada, courts have held that a five year post-employment restriction is per se invalid. Certainly, businesses that require two year post-employment restrictions will be subject to less scrutiny, but the further you extend beyond the two year period the more likely a court is to refuse to enforce the agreement as unfair. Remember; courts have consistently upheld agreements limited to a one or two year duration.

The covenant not to compete must also be limited to a reasonable geographic area. An example of an appropriate geographic area would be a restriction on conducting a similar business or engaging in a similar trade in Clark County or perhaps the entirety of the State of Nevada. A court will look at how far your business reaches and the effect of the restriction in terms of competition.

The covenant not to compete must be directly connected to the purpose of the employment. Additionally, if it is offered prior to the beginning of employment it is far more likely to be upheld. Agreements entered into by current employees will be viewed with special scrutiny by a court.

What a Court Might Do With a Poorly Drafted Agreement

In some cases courts have enforced such agreements but modified them from the bench. Usually, this will involve further restricting the rights of the employer under the agreement and increasing the rights of the employee. That’s why your best bet as an employer is to have an agreement that is reasonable in its scope from the outset.

What You Need to Do

The best option for any business is seek legal counsel for the drafting of restrictive covenant or covenant not to compete agreements. Counsel can also protect employers by incorporating provisions in the agreements that dictate what will happen should the employee breach the agreement by seeking employment with a competitor or disclosing business practices or trade secrets to the competition.