Negotiating a Covenant Not to Compete as an Employee

A business person holding a card that states "terms and conditions"

A tough negotiation between an employee and his or her employer can seem like a one-way negotiation when the employer says sign this.  After all the employer may approach the employee with a covenant not to compete as a take it or leave it situation. In this scenario the employee may feel that he or she has little choice.  The reality is that may be true on the one hand. On the other hand, there are a host of things to consider and ways to provide constructive feedback.  Some key negotiating topics for consideration are presented here for consideration.  This can be made into a win-win scenario when needs are addressed and each party listens to the concerns of the other.

What is a covenant not to compete?

An employer may ask an employee to sign a covenant not to compete so that

the employee will agree not to compete with the employer for a period of time within some geographic area after leaving the firm. 

Before ever signing a covenant not to compete either when offered a position or when sitting in a current position, it is a good idea to talk with your employer and discuss interests.

The employer clearly has an interest to protect the company, company lists and information that may be proprietary in nature.  Elements may extend to not saying derogatory remarks about the employer, the nature of the covenant not to compete and the amount of any payment, if any, paid for signing the covenant not to compete.

Concerns of the employee

The employee may not want to sign the covenant not to compete.

The covenant not to compete takes away rights from the employee. 

Any time rights are taken away there is an implication that there is a cost involved.  When there is a cost involved that implies a valuation associated with those costs. The valuation may indicate the value of the covenant not to compete alerting the employer to the need to pay something for the employee giving up these rights. 

You may want to consult with an attorney and learn about state law in your geographic location to understand what rights you have

and what your options are going forward. The attorney can also determine if the language is legal and fair in your state. In some states a covenant not to compete is illegal. If there is a concern you can bring this to the attention of your employer.

If there is a payment, the payment may be a one-time payment, a permanent increase in salary, or some mixture of the two.  The valuation of a covenant not to compete agreements is factual in nature. It is something that business valuers can determine. Here are several articles associated with determining the value of a covenant not to compete.[1] The second link in the list of the footnote identifies 11 factors to consider. Valuing the covenant not to compete goes beyond this commentary.  

An appraisal or calculation report

If the determination of the fair market value of a covenant not to compete is a material item,

you may want to consider reaching out to a qualified business appraiser for a qualified appraisal

to assist you should litigation be an issue.  Other wise consider reaching out to a qualified business appraiser for a calculation report to provide you with information to assist you with a negotiation with your employer. Either way, reaching out to someone with expertise on how to calculate the financial impact may prove to be very helpful.

How can you push back and share your concerns?

For example, you may have the concern of not being able to find employment in the future.  There could be layoffs. The company could move and you may not be able to apply for jobs in your area, because your employer still has the right to keep you from working for a competitor in your area.

Perhaps instead of a noncompete agreement what is needed is a non-disclosure agreement to protect proprietary information or trade secrets.

If your employer has a concern about you leaving and you reaching out to current clients,

a non-solicitation agreement may be more appropriate. 

That way you would be prevented from wooing away current clients should you leave the firm if that is their interest.

If the employer is vehement about you signing the agreement, is not offering you a financial incentive and is presenting you with a take it or leave it scenario, you may want to consider all of your options. This may include exploring other employers and potentially leaving the firm or signing the agreement.

Generic versus specific language

The employer may have drafted language that is generic in nature and applied the same covenant not to compete to all employees. If that is the case

consider suggesting specific language to address your concerns after having spoken to an attorney. 

When negotiating the size of the geographic area, the duration of the prohibition (in months or years) and the amount of compensation one or all of these elements may be applicable.  You could make a case for a smaller geographic area; a shorter duration of the prohibition and a larger dollar amount being paid to you.

Time versus money

As indicated earlier compensation for giving up rights may be an issue.  Perhaps the employer cannot pay you for signing the covenant not to compete. That may be company policy.  However, this policy may be a very helpful as an element for salary negotiations with your supervisor.

Think of what it might mean to you to obtain a permanent raise for a considerable amount of time working for your employer.

If not salary, perhaps you could negotiate a severance package should you leave the firm, a stock, bonus, stock options, a bonus, or some other form of payment. Think outside the box. It may be possible to negotiate health insurance costs, more annual or personal time, more flexible hours, working from home, or something else that matters to you.

Overview

Clearly the employer has interests.  To be fair, so do you. 

Pushing back in a reasonable and fair manner indicating your concerns diplomatically would likely be received well by an ethical employer. 

The employer should be willing to listen to your needs and interests and be willing to work with you.  This commentary is being offered to give you some ideas on what to consider should you have a covenant not to compete presented to you by your employer.  Remember, reach out to an attorney for legal advice.

About the author

Mike Gregory is an expert on conflict resolution business to government (IRS), business to business, and within businesses. Mike is an international speaker and he has written 11 books including Business Valuations and the IRS: Five Books in One, The Servant Manager and Peaceful Resolutions. Mike may be contacted directly at mg@mikegreg.com and at (651) 633-5311. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]