Finding great employees for your team can be tough, and sometimes holding on to those employees can be just as hard. Losing quality employees to competing enterprises is a fact of life for many business owners, whether to an existing competitor or because an employee wants to strike out on their own. What can a business owner do to protect their company from an exiting employee stealing customers or encouraging other employees to leave with them?
Many business owners believe that their best protection comes from a non-compete agreement. What we’ve found is that when a business owner asks “Can I get my employees to sign a non-compete agreement?” what they’re really asking (even if they don’t know it) is “How do I protect my business?” Before addressing the latter, we’ll first discuss why non-compete agreements aren’t always available as an option.
Restrictions on competition in Colorado
Under Colorado law, there are 4 general exceptions under which an employer may restrict its workers from engaging in competitive activities. They are:
- In connection with the purchase and sale of a business;
- A contract for the protection of trade secrets;
- A contract providing for the recovery of the expense of educating and training an employee who has served the employer for less than 2 years; or
- An executive or management personnel and officers and employees who constitute professional staff to the executive or management personnel.
If the facts do not fit one of those 4 exceptions, Colorado courts will likely void an agreement restricting competition by employees, including non-competes and, possibly, non-solicitation agreements. If an employee violates one of these agreements, understanding if your company should pursue litigation can be tricky, and achieving resolution can be time consuming and costly. As a result business owners need a degree of certainty that the agreements they use with their employees will hold up to the scrutiny of a court.
How can you protect your business?
In the case of the average employee, we recommend utilizing agreements that focus on protecting the business’ proprietary information and relationships. This section will discuss two types of restrictions that we commonly use with our clients: confidentiality/non-disclosure and non-solicitation. It’s also worth noting that these can also be used with independent contractors.
For any business that utilizes “trade secrets”, specialized know-how, or carefully cultivated customer lists, a confidentiality/non-disclosure agreement for employees is a great way to prevent those employees from using the knowledge they gain working for the company to compete with it.
Another way to protect a business from a competing employee is to require employees to sign a non-solicitation agreement. A non-solicitation agreement doesn’t restrict the employee’s ability to compete with the company, but it does create some boundaries if they choose to compete. A non-solicitation agreement typically prohibits the employee from attempting to steal customers from the business if they choose to leave. In addition, many non-solicitation agreements prohibit an employee from attempting to hire away the company’s other employees or interfering with relationships with vendors or suppliers. It’s worth noting that Colorado Courts may only enforce this to the extent it protects “trade secrets”.
These two types of provisions can go a long ways towards preventing an employee from using their employer’s resources to set themselves up to start or join a competing business.
Are there any circumstances where a non-compete is advisable?
Non-competes can be a powerful tool to protect a business from competing employees when used properly. Practically speaking, we usually draft non-compete agreements for our clients for two types of employees: executives and those employees that have an ownership interest in the business. In all instances, including confidentiality/non-disclosure and non-solicitation agreements, the temporal and geographic scope of the restriction may not be too broad, or an otherwise enforceable agreement may be voided by a court.
Competition from current and former employees is a concern that every successful business owner must face. In Colorado, the enforceability of non-compete agreements is limited, so a company should utilize them sparingly and only after consulting with legal counsel. There are other options available to a business owner, however, and we recommend using confidentiality and non-solicitation agreements to protect a company’s relationships and trade secrets.