Alternatives to Non-Competes with Employees

Jacob Orosz headshot
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

If your business is located in a state in which employee non-competition agreements are illegal (with California being the most notable example), you should know that there are two primary alternatives for protecting your interests:

  1. Non-Solicitation Agreement: A non-solicitation agreement only prohibits an employee from soliciting your employees or customers. It doesn’t prevent them from competing with you as long as they are not soliciting your employees or customers. Non-solicitation agreements are most common in service businesses that have strong customer relationships. The major advantage of non-solicitation agreements is that they may be legal in some states in which a non-compete is illegal.
  2. Confidentiality Agreement: This is often called a non-disclosure agreement (NDA), and at a minimum, all employees should sign this agreement. An NDA can prevent employees from disclosing trade or other secrets to new employers. It may also be so difficult for the employee to comply with an NDA that they may pass on certain job opportunities to avoid violating the terms of the agreement. The major advantage of confidentiality agreements is that they can be designed to protect your business’s confidential information throughout the sales process.

Collectively, a non-solicitation agreement and NDA serve as highly effective psychological deterrents. Often, deterrents are more effective than other means.

This article offers tips on when to use a non-solicitation agreement and confidentiality agreement and specific advice for using each tool to help protect the value of your business.

Non-Solicitation Agreement

A non-solicitation agreement only prohibits an employee from soliciting your employees or customers. It does not prevent them from competing with you as long as they are not soliciting your employees or customers.

It can be a stand-alone agreement or it can be included as a component of another agreement, such as an employment, non-compete, or non-disclosure agreement.

Non-solicitation agreements are most common in service businesses that have strong customer relationships. These agreements may be legal in some states in which a non-compete is illegal.

This is often an effective enough means to prevent your employees from competing with you, as it may prevent a band of employees from grouping together and poaching your customers.

Additional measures can be created to strengthen the non-solicitation agreement. Past or future bonuses can be retracted or withheld if they violate the terms of the agreement. For example, if five of your employees leave to start a competing business, you could withhold any bonuses or other payments if they violated the terms of your non-solicitation agreement.

Non-solicitation agreements can also serve as a form of protection if the employee decides to work for a competitor. Your agreements need to be properly drafted for these mechanisms to be enforceable.

Non-Disclosure Agreement (NDA) / Confidentiality Agreement

All employees should sign an NDA, at a minimum. An NDA can prevent employees from disclosing trade or other secrets to new employers. It may also be so difficult for the employee to comply with an NDA that they may pass on certain job opportunities to avoid violating the terms of the agreement.

For example, if you employ someone who has access to trade secrets for creating your product and a competitor hires this individual, your employee will be prohibited from disclosing your trade secrets to their new employer. If their potential new employer learns of the NDA the employee has signed with you, they may pass on hiring this individual due to the risk associated with doing so.

An NDA can also protect other information as well, such as:

  • Customer names
  • Prospective client information
  • Pricing, if private
  • Financial information
  • Employee names, salaries, benefits, etc.
  • Intellectual property — software codes, designs, technical processes, etc.

It is important to note that in order to protect the above information, your NDA should contain a clear definition of “Confidential Information.” If you wish to protect specific elements of your business, clearly spell these out in the agreement.

Collectively, a non-solicitation agreement and NDA serve as highly effective psychological deterrents. Often, deterrents are more effective than other means.

For example, an ADT security sign may be all you need to protect your home. Similarly, in business, an NDA and non-solicitation agreement may be all you need to adequately protect your business, even if you never intend to sue an employee for breaching the terms of these agreements.

Summary: Alternatives to Non-Competes with Employees

Your employees are a key asset to your business. To maximize the value of your business, you must protect the nature of these relationships. You must also prevent your employees from potentially damaging the value of your business. While most businesses use a non-competition agreement to prevent their employees from causing harm to their business, non-competes are illegal in certain states. If a non-compete is illegal in your state, or if asking your employees to sign a non-compete is impractical, then you have two sound alternatives — a non-solicitation agreement and a confidentiality agreement. Both tools can be successfully used to help ensure you protect the value of your business.