“I have an incredible offer, but they want me to sign an aggressive non-compete agreement, what should I do?” “I was just let go and now the company wants to prohibit me from getting a job anywhere else, is this legal?” With a great deal of movement in today’s executive labor market, we are getting many questions about non-compete agreements.
Non-compete agreements (NCAs) can bewilder even experienced executives. Sometimes eager new hires sign NCAs along with an offer letter without any thought, only to be forgotten until a great opportunity elsewhere comes along later. There are so many variations and issues around NCAs, and laws differ from jurisdiction to jurisdiction (countries and states). I‘ll cover some of the basics here, but it is always best to consult an employment lawyer if you are confronted with an agreement that makes you uncomfortable or that may limit your career options.
Generally, a non-compete agreement or clause is a contract entered into between two parties (usually an employer and an employee or a buyer and a seller) that restricts one party from doing business with or going to work for the competition. According to US law, since an NCA is a contract, some kind of “consideration” must be provided in exchange for the promise not to compete. That consideration might be a bonus paid at the time the agreement is signed or a payment (sometimes in the form of a severance payment) at the time the agreement goes into effect.
Sometimes companies require employees to sign an NCA as part of the initial employment agreement – the consideration, therefore, is employment. In other instances, due to increased threats by competitors or to a change in leadership of the company, NCAs are presented after an employee has been at the company awhile. Another tactic is for companies to request a promise to not compete when an employee is leaving their employer.
We have seen recent graduates through top level executives encounter NCAs, and more frequently with business development or sales professionals. Logicallly, non-compete requirements vary with a person’s access to sensitive data and exposure to clients. Companies invoking NCAs typically limit competition by geography, by scope/industry/market and by duration. If you are asked to sign an NCA, ensure that it covers a very specifically defined set of limitations. If the contract is too broad or vague it can lead to an unfair situation if /when invoked. It is true that the more general an NCA is, the harder it is to enforce, but to dispute a contract can be a costly legal battle that you probably won’t want to endure.
Like any contract, an NCA also requires “agreement” to be legally binding. I recently worked with an alumnus who, as part of a reduction in forces, was being let go from a small division of a very large diversified company. He was asked, as a condition of receiving a generous severance package, to sign an NCA that would preclude him from doing business with any competitor of the larger organization. As offered, the agreement would have prohibited him from working with any food, beverage or related CPG company, the exact markets where our graduate had built his reputation throughout his entire post-MBA career. Clearly, the terms of the agreement were unduly restrictive and would have severely limited his career options. He negotiated the terms of the agreement and ended up signing a more reasonable contract – one that ensured that he would not be in a position to use trade secrets against his former employer, yet allowed him to seek employment with companies outside the small segment that the division with which he worked for the last two years was competing.
It may feel awkward to question the terms of a non-compete agreement when you are just joining a company, but it is smart to review the agreement carefully. Ensure that the agreement provides for adequate severance pay in the case of separation – suggest payment for the same duration of the non-compete. If you are asked to sign an agreement after you are already employed, don’t take it lightly. Even if you can’t imagine ever working for a competitor, know it could happen. Be sure the terms of the agreement won’t leave you unable to get a job or preclude you from later accepting the “dream job” you’ve been coveting for years. Don’t be afraid to find an attorney specializing in the corporate laws in the state where the company is based, to get well informed advice.
If you have signed an NCA and you are laid off, ask to be released from the agreement and if they agree, get the release in writing. If you are considering an opportunity with another employer it is important to let the potential employer know that you are under an NCA. Carefully choose the timing of this disclosure. Typically, I would advise that you give a company the chance to absorb your value proposition and become sufficiently interested in bringing you on their team before you bring up the possible hassle of getting you onboard. The new company’s legal department might be helpful in evaluating the limitation of the NCA in reference to the new opportunity. Of course, in a small industry where a company knows they are “stealing” away talent from their competitor, it might be the first thing you talk about with them. A good rule of thumb is to be upfront and honest and apply the “assume it will be published on the front page of the newspaper” saying.
If you are dealing with a non-compete situation (and you are an alumnus of a Darden degree program) and would like to talk it through with a career advisor from the Armstrong Center for Alumni Career Services, please contact us to schedule an appointment.
Connie Dato English, Executive Director of Alumni Career Services, The Armstrong Center for Alumni Career Services, University of Virginia Darden School of Business.
