Noncompete and nondisclosure agreements have become common pieces of employer/employee and contractor relationships, as well as in relationships with suppliers and parties in a range of contracts. Many enterprises benefit from having, and using, these agreements, which can offer protection against unauthorized use of important assets, such as intellectual property, customer lists, business models, strategy, and broader industry relationships. These concerns, which are valid and important to keep in mind, drive the regular use of such agreements. It makes sense to have an understanding of what these agreements are and how they work as part of any plan to incorporate them into your relationships.
As an initial matter, an enterprise should use noncompete and nondisclosure agreements in situations where it needs to protect intellectual property, confidential information, and trade secrets from competitors and former employees. (Trade secrets and trade secret policies will be covered in a separate blog, and form part of an enterprises’ overall IP strategy.) While both agreements share some common elements and purposes, they do in fact operate differently and offer differing types of protection.
Noncompete agreements
Nondisclosure agreements
Used to protect employers’ customer relationships, special processes, trade secrets, and confidential information.
Used to protect business confidential and proprietary information.
Prevent employees/contractors from working for a competing business after leaving current employer.
Prevent employees/contractors from sharing business confidential and proprietary information.
Agreements are enforced for a predetermined period of time.
Agreements may have a longer duration and can be enforced for an indefinite period of time.
Apply in a limited geographic space.
Apply in a broader geographic scope.
Noncompete agreements
Noncompete agreements are typically used to prevent employees, and contractors in certain situations, from working for a competing business after leaving their current employer. These agreements can help to protect the employer’s customer relationships, special processes, trade secrets, and confidential information. Noncompete agreements are commonly used in industries in which an intellectual property plays a significant role and is critical to the enterprises’ strategy, such as tech, healthcare, and finance industries, although they may be used elsewhere when appropriate. Under a noncompete agreement, the employee is prevented from working in the same sector for a predetermined period of time. This means the employer can train the worker and build their business in the sector without worrying about creating a resource that will benefit a competitor in the process. There are, however, some very specific concerns with noncompete agreements that must be kept in mind.
Because noncompete agreements limit a person’s ability to find employment, public policy and state laws limit them, to make sure they serve a valid purpose. In most states, noncompete agreements must be closely tailored to the employer’s business needs, apply in a limited geographic space, and last for a reasonable duration. For example, a noncompete that prohibits a worker from working anywhere in the world for the foreseeable future would almost certainly be found unenforceable. In contrast, an agreement that lasts one year and applies in the geographic area where the employer operates may be seen as reasonable. Even so, in some states noncompete agreements are not allowed in most instances. One exception to broad state prohibitions against noncompetes include instances where an owner sells a business’ assets or the business as a whole–noncompetes are permitted in such situations to protect the value of the business transferred. Due to the state specific nature of the limitations, it is important to consult qualified counsel for advice.
Nondisclosure agreements
Nondisclosure agreements, also known as confidentiality agreements, are used to protect a business confidential and proprietary information. These agreements may be used with employees, contractors, and other third parties who may have access to confidential information, such as business plans, pricing strategy, IP, and financial data. In contrast to noncompete agreements, nondisclosure agreements may have a longer duration and broader geographic scope of application. Indeed, it may be possible to have an indefinite period of application. Nondisclosure agreements will carefully define the scope of the information they cover, and in most cases, nondisclosure agreements will include provisions that will allow some information to be disclosed under certain, well-defined circumstances. In addition, these agreements should contain clear enforcement mechanisms that protect the disclosing party if a warranted disclosure occurs. Consequently, it is extremely important that nondisclosure agreements be carefully drafted, taking into account the disclosing parties’ interest and risks.
In many cases, a broad employment agreement will add both noncompete and nondisclosure clauses. Generally, this will save time and make for an easier agreement. The parties should consider what might happen if a court were to find the entire agreement invalid for some reason. If this should happen, these clauses might not offer the protection the employer seeks.
Drafting carefully crafted documents that align with the enterprise’s goals, and values, is important in all contexts, and should be kept in mind here. Agreements that do not comply with state law, or which do not adequately provide the protection that the enterprise requires, may end up being more destructive than one expects.
As enterprises grow, they demand more people power. And as they work to respond to that demand, enterprises inevitably encounter employment law questions. To avoid costly and damaging missteps, it is important for founders and leaders to understand the laws involved in the employer/employee relationship.
“Employment law” refers to a set of legal rules, regulations and principles that govern the relationship between employers and workers in the workplace. This includes a very wide range of topics (such as hiring/firing, compensation and benefits, workplace safety and health, Civil rights/discrimination, harassment, and employee contracts), each of which may have a significant impact on the enterprise as it grows and operates. Consequently, founders and entrepreneurs should be vigilant about the relationships between the enterprise and its workers. At the same time, staying on top of these relationships can be difficult due to the complexity of the laws that are involved and the role they play.
Employment laws aim to protect the rights and interest of workers, and they do this by ensuring that employers comply with legal requirements which are often enforced by government agencies. Some examples include the Fair Labor Standards Act, which establishes minimum wage and hour laws for employees, the Americans with Disabilities Act, which prohibits discrimination against individuals with disabilities, Title VII of the Civil Rights act, which prohibits workplace discrimination, and state laws that include Workers Compensation requirements. Each of these laws regulate the employment relationship, although in different ways and to varying degrees.
Failure to comply with employment laws can result in legal disputes, including litigation, financial penalties, and damage to the enterprise’s reputation. Startups face a particular threat in this area because they often do not have resources to hire a dedicated HR person to handle legal compliance. In addition, the informal culture of many startups can make it difficult to ensure that their hiring, firing, compensation, and benefit packages are in line with legal requirements.
Some of the common areas of concern for startups include minimum wage and overtime requirement, employment classification (specifically, whether a worker is an employee or independent contractor), tax compliance, and use of equity as part of an incentive program. Other areas of concern involve discrimination and harassment or workplace safety claims. Disputes in any of these areas can lead to lawsuits, fines, and regulatory intervention. When processes like these begin, the time and energy they take from a startup can be devastating.
Even while the concerns are significant, they can be managed. This begins with a comprehensive overview of employment policies, practices, and procedures to identify areas of legal risk, ensure compliance with federal, state and local laws, and assess the overall HR strategy. These assessments are often called an “Employment Law Audits” and they provide a road map of where corrective steps may be needed – avoiding the disputes and conflicts that can derail success – and in many cases how to effectively protect the enterprise’s business and intellectual property.
We are planning a series of blogs with additional information on employment law topics that we hope are helpful as founders begin to grow their enterprises. The first topic, found below, discusses employment agreements.
Thinking through when you need an employment agreement.
Employment agreements are an effective way to manage the employee/er relationship.
Here are some things leaders should consider when thinking about putting employment contracts in place for their employees and contractors.
An employment contract serves as a legal agreement between the employer and employee and contains the terms and conditions of the working relationship. Employment contracts are important for several reasons:
Clarify expectations: The employment contract describes work responsibilities, compensation, benefits, work hours, at-will status, and other terms of employment. This makes it less likely for misunderstandings to occur and ensures both parties share an understanding of what can be expected.
Protect rights: The employment contract may also include provisions that protect each parties’ rights, such as confidentiality, non-compete rights, and intellectual property rights. These are important provisions for any enterprise but have a heightened importance for most startups depending on new innovations as part of their business strategy.
Define a mechanism for dispute resolution: The employment agreement can provide an effective dispute resolution mechanism should a disagreement arise. This may include mediation or arbitration provisions before litigation, which is helpful in most cases, as well as to determine where any litigation must be filed and heard, which can be very helpful when remote workers are involved. This means that an employer can require any claims to be heard in a court near the employer’s offices, instead of somewhere remote and out of state.
Comply with local legal requirements: Employment contracts may be required under local laws in some jurisdictions. Even when they are not, they are still a good practice to have in place to ensure compliance.
Putting employment contracts in place is easiest at the beginning of the employment relationship before the employee starts working. It is possible to put the agreement in place after the relationship has begun, but employers must keep in mind the need to advance additional consideration for the new agreement.
Employment contracts will often contain a number of common elements, although they may differ depending on the specific job and industry, including:
Job title and description: stating the employee’s responsibilities and expected performance standards and goals.
Compensation: stating the salary or wage the employee will receive, along with any. Bonuses, commissions, or other forms of incentives. (Note that stock options will be treated in a separate agreement.)
Benefits: where details on any benefits (health insurance, retirement plans, leave and other perks).
Employment terms: this section describes the length of employment, including start and end dates, if applicable, and any termination clauses. Typically, this would include discussion of termination for cause or without cause – and without cause is most common.
Confidentiality Clause: any requirements for maintaining confidentiality, which are extremely important when the employee has access to proprietary information, will be included.
Non-compete clauses: this section will refer to the reasonable limits placed on an employee’s ability to work for a competitor after their employment ends. State laws regulate non-compete clauses, so employers should be certain that they can rely on the language in their agreements.
Intellectual Property Rights: the “work for hire” doctrine will most often control when an employee creates intellectual property for an employer. The employment contract should clearly document the parties IP rights in light of this doctrine.
Dispute resolution and forum selection: this section should contain a framework for resolving disputes as efficiently, and economically, as possible. Including choice of law.
Employment contracts offer clarity to both employers and employees and can help you avoid conflict in the future. The lawyers of Cutting Edge Counsel are available to meet with you to explore how we may be able to assist you with your employment law questions. Schedule a free consultation.
