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BusinessColumnistsJamie Herzlich

Small Business: Using noncompete clauses

Nutricap Labs chief financial officer Mike Scagluso sees

Nutricap Labs chief financial officer Mike Scagluso sees a noncompete clause with certain employees as "a form of insurance and also lets the employee understand how important the company information is." (July 2, 2012) Credit: Newsday / Audrey C. Tiernan

The loss of a key employee can be devastating enough for a small business.

But losing a key employee who then takes your company's proprietary knowledge and clients with to compete against you could mean the end of your business.

Noncompete agreements can help prevent that. The key is to structure them so they'll be enforceable, say experts.

"Generally courts don't like noncompetes because it prohibits an employee from working," says Thomas B. Lewis, a partner in charge of the employment litigation group at Stark & Stark in Princeton, N.J.

A noncompete agreement limits the ability of an ex-employee to work in his or her professional field for a specified time period and within a specific geographic location, he explains.

Since this impacts a person's livelihood, companies must be cautious when crafting these agreements, says Lewis, who offers more on noncompetes at bit.ly/Nearup.

For starters, the broader the agreement, the harder it is to uphold.

"The principal notion is that the agreement has to be narrowly drafted and have restrictions that are no greater than necessary to protect the company's legitimate business interests," says Jeffrey M. Schlossberg, partner and chair of Uniondale-based Ruskin Moscou Faltischek's employment law practice group.

The agreement should be "specific to specific" employees and not be one size fits all, he notes.

Enforcing agreements

There must be a good reason for trying to enforce a noncompete, such as when the employee has access to confidential information, he adds. The burden of proof is on the company to show that it has taken measures to protect this information and that it's in fact confidential, says Schlossberg.

Generally, the more limited in scope the restriction is with regard to geography and time frame, the more likely a court will rule the restrictive covenant to be enforceable, says Keith Gutstein, a partner with Kaufman Dolowich Voluck & Gonzo Lp, an employment law firm in Woodbury.

"The limitations have to be reasonable," he notes.

For instance, in most circumstances a nationwide bar of someone working in their industry would likely be less enforceable than asking for a more limited radius, like 50 miles, says Gutstein.

Of course, this becomes a bit trickier for companies doing business globally.

"I've got clients in Dubai and London and Australia," says Jason Aptekar, chief executive of Westbury-based Mithril Technology, which provides business and strategic technology consulting services. "How do I enforce a noncompete when my reach is literally global?"

That's why he's woven a combination of noncompete and nonsolicit language into his agreements with both employees and clients. For instance, if a client solicits a Mithril employee away from the company, Mithril has to be paid a fee. And an employee or former employee can't solicit business with a client or prospect he or she met through employment at Mithril for a specified period.

Nonsolicit agreements -- which prohibit an employee from poaching your clients or prospects -- can sometimes be easier to enforce than noncompetes.

'A form of insurance'

That doesn't mean noncompetes won't stick if they're properly drafted, and oftentimes they can serve as a deterrent for employees looking to work in a directly competitive environment, says Lewis.

"It's a form of insurance and also lets the employee understand how important the company information is," says Mike Scagluso, chief financial officer at Nutricap Labs Llc, a Farmingdale-based contract manufacturer of vitamins and nutritional supplements.

Nutricap has noncompetes in place with fewer than half of its 40 employees, generally those in positions midlevel and up, says Scagluso, noting they protect Nutricap's proprietary customer and product information.

The agreements do contain some limitations, mainly on the length of time an employee cannot compete, he says. "From the company standpoint you want to make them as broad as possible, but from a practical standpoint you want to put some limitations on them so they are enforceable."

More tips:

Have an employee sign the noncompete agreement at the time of hire.

Consider offering the employee compensation during the length of the noncompete.

Remind the employee of the agreement when he or she is leaving.

Act quickly if the agreement is violated.


Source: Jeffrey Schlossberg

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