Non-compete agreements, or non-competition agreements, are contracts into which an employer and an employee enter that restricts the work the employee can perform for another company when the employee’s tenure at the employer company ends. Typically, it’s illegal to intentionally restrain trade; however, some states allow employers and employees to voluntarily enter into agreements with future employment restrictions. Contractors have several reasons to require that their high-level employees (e.g., C-Level) enter non-compete agreements.
While these contracts are often used to protect trade secrets or unique software, valid and enforceable non-compete agreements are also a powerful employee retention tool. Given the
current labor shortage, ensuring qualified field employees do not leave your company for the competition is more critical than ever. Protecting positions such as PMs, estimators, or field superintendents with a non-compete agreement can help retain experienced employees, thereby maintaining your company’s ability to perform.
However, it is important to consider whether non-compete agreements are the best means for your company to achieve this goal, so be sure to define what your company is trying to protect. Think beyond the common assumption that noncompete agreements are required as a matter of policy: Does your construction company have actual trade secrets that it needs to protect? Does your company have unique, proprietary software that could jeopardize the company’s ability to out-bid competition if disclosed?
If you’ve determined the need for a non-compete agreement, then it’s important to understand how it works, the costs of drafting the agreement, the manner and the costs of enforcement, and the potential benefit or negative impact on your company and its employees.
Know Your Jurisdiction
To determine if such an agreement would be a good fit, start with some basic legal considerations. From the outset, you’ll need to know whether or not your company operates in a
jurisdiction that favors or even allows non-compete agreements. Some states like California do not allow the enforcement of non-compete agreements. Other states like Florida have very distinct statutes defining the circumstances under which a company can restrict the future employment of one of its employees.
Also in some states like Florida, the length and type of restriction varies depending on the seniority of the employee subject to the non-compete agreement and the exposure of the departing employee to company-sensitive materials or to trade secrets. Other states view non-compete agreements on a case-by-case basis.
Costs of a Non-Compete Agreement
Sometimes your company can have difficulty ascertaining the costs associated with initiating and enforcing non-compete agreements. However, it’s important not to disregard this
step. Your company’s concerted attention is required when evaluating whether it makes sense to require non-compete agreements for certain employees.
Drafting the Contract
The initial drafting and enforcing of the document each have their own procedures and associated costs. A non-compete agreement is a legal contract and should involve the expertise of an attorney. A non-compete agreement can exist within an employment contract or as a separate non-compete contract. Some states require that an employee actually works at the company at the time the non-compete agreement is executed, so the timing of the agreement is crucial. Your attorney should ensure that the non-compete agreement is valid in the jurisdiction in which you seek enforcement, and that the company takes all of the required steps in order to best pursue its remedies in the event of the employee’s breach of the agreement. Presuming that the agreement is valid, there is a cost associated with your counsel’s drafting and annual review of an agreement that is appropriate not only for your company, but also for the particular situation that complies with any existing statutes or the case law in your jurisdiction.
Although the costs might vary depending on the amount of time it takes to draft the contracts, they are typically manageable and easily budgeted for upfront. Of greater concern are the potential costs associated with the required enforcement of a non-compete agreement, which are more difficult to assess.
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Copyright © 2017 by the Construction Financial Management Association (CFMA). All rights reserved. This first appeared in CFMA Building (a member-only benefit) and is reprinted with permission.