The Wisdom (or Not) of Noncompete Contracts

Written by Ray Silverstein

Companies use noncompete contracts to protect their interest and restrict ex-workers from capitalizing on contacts or information obtained during their employment.

Typically a sales-specific non-compete contract says that, should a salesperson leave the company, he or she cannot take the employer's clients with him/her. The contract restricts the salesperson from doing business with clients for a specific period, usually a period of two or three years.

Sounds logical, right? After all, you've worked hard to build your client base, and you have every right to protect it.

The problem is, noncompete contracts offer several drawbacks. For one thing, they aren't popular with savvy salespeople who may be reluctant to sign them. As a result, you may have trouble finding the kind of salesperson you want.

Furthermore, such contracts are very difficult to enforce after-the-fact. It's not like you can follow your former salespeople around and monitor their activities. And even if you did have proof that someone violated the contract, do you really want the hassle -- and bad press -- of taking a former employee to court?

The reality is noncompete contracts don't always fare well in the courtroom. Every state has its own definitions of what a fair contract looks like. Some states strictly limit such contracts; in California, they're prohibited altogether. In the past, non-compete contracts have been viewed as standing in the way of an individual's right to earn a living.

So if you're going to insist on a non-compete contract, make sure it's in strict compliance with state law.

Do Try This at Home

But before you pick up the phone and call your attorney, consider an alternative arrangement. Instead of a noncompete contract, how about a 300% Compete Contract?

Under the 300% Compete Contract, ex-salespeople have the right to take your clients with them. The catch? They must pay you for the privilege, and pay you handsomely -- 300% of the client's lost annual billings, to be precise.

A number of entrepreneurs in my group advisory boards have implemented this concept, and they report good results. For one thing, salespeople are less reluctant to sign them. For another, they're infinitely easier to enforce. After all, it's easy to determine the actual financial value of a client's billing. In addition, it alleviates a fair amount of the emotional turmoil triggered by these situations.

Look at it this way: If an employee -- and a client -- want to leave you, you've pretty much lost them already. But instead of clutching a damp hankie, you'll have fistfuls of dollars to dry your tears. Which would you prefer?