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FAQs | Human Resources

Non-Compete and Reimbursement Clauses in Employee Contracts

Q: What fair and enforceable legal agreements can or should be made with employees-- such as non-competes, reimbursement for training, non-disclosures, etc.?

A) Regarding Reimbursement:

There isn’t any legal way to make an employee stay with your firm. You can, however, stipulate up front that they reimburse the company for training, relocation expenses, etc.

Many businesses will pay for employees to take training that furthers their career and utility to the business, but the employee has to agree to stay with the company for a certain amount of time, or repay the cost of training. You can put a stipulation in a contract that says that the employee agrees to stay for a certain amount of time or has to pay for the training himself. Or, you can stipulate that they pay you back on a prorated payback program --just like you see with many tuition programs. However, this will only get you paid back for a portion of the education and doesn't address the cost of turnover (which is the expensive part).

Headhunters often work on a similar model. They agree that the person who they placed will stay at the job for a certain amount of time or the headhunter does not get paid (or must re-do the search for free, depending on their contract with the employer).

It’s natural that employers want to receive a return on training and education dollars. When an employee leaves, their investment fails to meet its expected return. If the employee does not want to reimburse his employer for training expenses (including all that goes with it like travel, salary, etc), he should either stay the agreed upon time or not accept the training. It’s also wise to think carefully about the employee before you give the training or relocation benefit.

Employees will leave for various reasons. They will leave whether they have training or not. They will also leave even if they have signed an agreement, at which time you may get stuck in legal proceedings. Case in point, Richard Hayman, [rhayman@hayman.com] has employment agreements which state a reimbursement policy for amounts paid to train and educate an employee. They have been to court for enforcement and have collected, but it isn’t fun to get embroiled in a legal battle.

B) Regarding Non-compete:

You can put a non-compete clause in the contract that prevents someone from leaving your firm and establishing a competitive company within a certain time period or area. But realize that these contract stipulations will not rid you of legal battles. Richard Hayman, also has non-compete agreements in place. Some former employees have disregarded them can and have gotten away with breaking their promises to the firm. Sometimes, by the time one gets to court the non-compete period as passed.

C) Regarding Nondisclosure Agreements:

The following is Mario Morino’s recent speech at Coffee and DoughNets. The full transcript is attached and can be found at: Recruiting Speech

"Legal restrictions are tough subjects today. Non-compete issues are tough to negotiate. I would still argue you should try. They are enforceable. You've got to be realistic and specific, and often you have got to be geographically-based. You can't have a universal clause, but you can be specific and it can have merit. You may not get it, but you should try.

"Nondisclosure agreements are essential. You don't want people talking about your business when they are no longer with you. That's a simple clause and it's not an undue constraint.

"Another thing that's very important is the non-hiring clause. If someone leaves, they are not going to hire from you directly for a one to three-year period. That's always a big risk because if you get the person who has brought everybody in and she leaves, guess what, they're all gone. Well, is it legally enforceable? Yes, it's legally enforceable, but its shadow alone is very effective, especially if it's a little larger company. When you simply put that in front of their legal staff and human resources team, you'll get a suitably nervous reaction.

"There are a slew of intellectual property issues--who owns what? Where is the line between work and home? We take a very hard-line position here. It comes from a lot of experience. We start out requiring that we, the organization, own anything anybody does, with the proviso that a person can request to create some intellectual property that is outside the scope of our work and that will not materially affect their responsibilities to the firm, and it will not be unreasonably withheld. We take this approach not to force controlled ownership, but rather to force the decision at the most relevant time. The ownership of intellectual property is seldom an argument when it's just an idea; only when it has value does it become a contested matter. You set up a process that's very fair and clear legally that if somebody has an idea they want to pursue, they lay out certain steps and conditions and there is no ambiguity about that. The key to success for this approach is: be clear in communicating the policy when recruiting someone and be fair in its execution.

"This is not about restricting people. You are trying to make sure it's going to be eminently clear who owns something, them or you. This clarity is important to the individual and to your business. If you leave this matter ambiguous, you will leave yourself and the business open to claims that could arise at the most unfortunate times. It happened to us. Somebody claimed ownership of a technology, they retained an attorney and only brought the matter up when we were considering an investment by a venture firm. Until we could get the matter resolved, it hung things up. This type of situation is especially foreboding if you are considering an IPO.

"In all of these agreements, be fair with all of your people, because it's a quid pro quo. It's a relationship you're trying to build. If you're not successful, you don't have to worry about them, but if you are successful, they will all come into play." -- Mario Morino

To overcome these human resource challenges, heed the following advice:

  • The best way to keep good employees is to treat them fairly and offer challenging work that helps them attain their goals while the company attains its goals.
  • Do the right thing for your employees, pay them well and prevent deteriorating corporate misbehaviors; those are the keys to an effective staffing plan. Development and reward for success are also key aspects.
  • Choose technical talent that is in it for the long haul and entice them with other incentives that keep them happy and willing to stay.

Resources:

  • Mark Milligan, [mmilligan@blackboard.net] recommends Steve McConnell's book Rapid Development. McConnell is a techie who is highly regarded by developers and managers on how to effectively manage software development projects. Chapter 11 on Motivation lays out what motivates developers, which are very different from manager motivations.

[Faisal Jawdat, faisal@visionfoundry.com; Anne Crossman, GoodJob@aol.com; Leif Johnston, leif@proxicom.com; Richard Hayman, rhayman@hayman.com; Michael Roden, http://www.emagination.com. Mark Milligan, mmilligan@blackboard.net; Dmhunterjr, Dmhunterjr@aol.com; Mario Morino, mmorino@morino.org]

 

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