Ask any buyer of a pest management company which asset garners the most value yielding the highest price, and the reply will be customer relationships, the profitability of those relationships, and the likely retention of these relationships during sale. Some of the best pest management companies we know have routes with longtime technicians who usually are treated like a close friend or family member by the customer.
While this is a great way to build a business, what protects you, the owner, from a technician who blurs the line of customer ownership and decides to leave — and take the customers he services with him?
Requiring employees to sign a non-solicitation/non-compete agreement is one way to make it more difficult for an employee to steal customers. If you are looking to sell your business, one of the first things a potential buyer will want to see is how your non-compete is written to help ensure high customer retention after the sale.
Your customer list is your most valuable asset. The idea is to protect it and not have an ex-employee become your worst nightmare. This is a risk that will most assuredly occur unless you implement appropriate legal safeguards.
The prudent business owner will develop an agreement with standard language that incorporates the employee’s agreement to abide by one or more restrictive covenants, whereby an employee who breaches such covenants can be sued by the ex-employer seeking monetary damages, and/or an injunction imposed by a court declaring the ex-employee inappropriately solicited customers.
Whose right is it, anyway?
Unfortunately for employers, most states frown on such restrictions being imposed on an employee who has a fundamental human right to earn a living. Consequently, the courts generally will favor an employee, unless the employer is able to establish the employee has illegally misappropriated employer trade secrets or used specialized training techniques to steal the ex-employer’s business. This becomes the competing interest, and the employee’s right to work vs. an employer’s right to protect legitimate business interests vs. customers’ right to choose whom they hire becomes the basic framework in which each situation is evaluated.
The difficulty applying such analysis becomes complicated when adding basic contract law principles, in which every contract, to be enforceable, must have consideration exchanged between the two parties to the contract. If an employee promises the employer to not compete or solicit, consideration is given on the part of the employee. But what did the employer give in exchange for the employee giving up a valuable right? Court cases throughout the United States have deliberated about whether merely providing a job is sufficient consideration given in exchange to make the restrictive covenants valid.
What if an employer gave the employee a small, but discreet bonus as specific consideration for the restrictive covenant, in addition to a job? Is this sufficient consideration, or is the amount too insignificant to even count?
To complicate matters, what is a trade secret deemed worthy of protection under the law? Does specific knowledge about a customer, in terms of the type of services the customer receives year after year, constitute a trade secret?
There is no one-size-fits-all solution. Therefore, the facts of each situation and how the restrictive covenant was written will be considered when determining whether the employer gets relief in court. What can the business owner do? The answer lies in two parts that should be included in the non-compete agreement:
1. Contingent Severance
Most employers don’t like the recommendation to pay a new employee an extra fee to compensate for giving up the valuable rights set forth in the restrictive covenants. Even if amenable, what is the right amount a court won’t consider as insignificant, and therefore be tossed out as a nullity? There’s no answer to this; therefore, it might be better not to guess and simply provide — in the employee’s employment agreement/offer letter — a provision that states the employer can, at its election, impose a restrictive covenant for a period of time that’s a range of months/years, with a corresponding dollar amount the employer will elect to pay at the time the employee is terminated.
If an employee were in a position in which he couldn’t do harm, no payment would be made upon his departure. Therefore, the employer can pick and choose whom to restrict upon exit.
For example, an employer can create the optional severance schedule depending on how long the restriction will be imposed. This ensures the consideration (if ever paid) is not immaterial, and allows the employer to defer a decision about payment — instead of guessing what to do up front and without knowledge whether the new hire will turn out to be a future threat. If the employer chooses not to enforce the covenant (and not pay the severance), the employee is free to go unencumbered. It’s the ultimate flexibility for an employer.
2. Liquidated Damages
Another way to avoid legal fees and the uncertainty of the outcome in a court proceeding when seeking to enforce the non-compete is to add a clause that states any breach of the restrictive covenant will have a set formula dollar value as the damages sustained by the employer. If a customer is taken by the ex-employee, the clause would state the agreed damages are two or three times the dollar value of the lost revenues for such customer, measured in the 12 to 24 months prior to losing the client.
This approach short-circuits all the factual issues discussed earlier about whether the restrictive covenant is even enforceable. It’s a simple and straightforward breach-of-contract action, as if the employer sold a customer account to the ex-employee for a stated price. It’s also difficult for an employee to overcome, because if the ex-employee ends up with the customer, it’s no longer about trying to prove illegal competition at all.
This approach is a significant deterrent to any employees thinking of taking the customers for free, as they’ll come to realize they can take the customers, but will be purchasing the customer for an agreed-on price.
In the end, a customer cannot be forced to stay. At least the loss of future revenue can be partially recouped by this approach.
John P. Corrigan, Esq., is a director in the mergers and acquisitions practice at PCO Bookkeepers. Contact him at info@pcobookkeepers.com.
Leave A Comment