Let’s face it! Employment Agreements are arguably created to scare the “bejeezus” out of employees.
The typical sections of an Employment Agreement include the following:
- Position, Duties and Reporting relationship
- Authority levels and limitations
- Exclusivity of service to the agency
- Compensation and Benefits
- Termination at Will by employee and for cause
- Insurance and licensing requirements
- Confidential Information
These are relatively innocuous and need to be spelled out to assure that the employee and employer are on the same page in these categories of employment. There are several legal sections that are Boiler Plate sections that include Waiver of Breach, Court’s Right to Modify Restrictions, Severability, Injunctive Relief, Entire Agreement and Modification, Choice of Law and Venue and, perhaps, an Arbitration Clause. Then, somewhere between the 7 “Thou Shalt’s” and the legal jargon we find the “Thou Shalt Not’s” that always become contentious if a contract is broken,
- Non-Disclosure
- Non-Solicitation
- Non-Competition
Whether or not the wording on these last three Negative Commandments are meant to scare or threaten employees with the ramifications of their actions if they leave and try to harm the employer, most of these sections do exactly that – threatens harm and mayhem if the employee leaves and doesn’t adhere to these rules.
However, the reality is that an unfair “non” clause can be fought and won – relatively easily – if the implication is that it protects the agency but doesn’t treat the employee fairly.
For instance, Non-Solicitation of Employees is perfectly acceptable – except the section falls apart if it is so specific that a former employee cannot work for another employer who has hired another former employee of the same agency for fear that they will be sued for potentially “soliciting” other employees to leave and go to the same place. Realize that a very fine line exists between social interaction and inducing employees to leave. The more specific you are the better you are able to protect the integrity of your employees from being poached.
Non-Solicitation of Customers or Prospects
If an employee has had contact with customers during his tenure at the agency it is perfectly acceptable to forbid him from solicitation of those customers for some (limited) period of time – usually one or two years – during which the agency will replace the employee relating those customers and attempt to retain the agency’s relationship with the customers through another employee). This period of time allows for an ‘even playing field’. Otherwise the former employee could use the relationship he gained while being paid by the employer to harm the employer by taking clients away or influencing them against the former employer. However, prolonged non-solicitation periods are often considered unfair to the former employee who should be able to compete after a reasonable period of time to allow for the employer to retain the client.
Similarly, if, during the last year, the employee has been in contact with prospects toward the eventual solicitation for insurance programs for the employer, it is quite acceptable to forbid the employee from soliciting those prospects for another employer. The courts have acknowledged that if the employee has been paid to create and mature relationships, those relationships should be protected for a few years on behalf of the employer before the former employee could re-solicit them for another agency employer.
Non-Piracy
While Non-Solicitation covers actions by a former employee designed to influence clients the employee has serviced, sold or administered, a Non-Piracy clause is designed to protect the agency (for the same two year period) against the loss (piracy) of all other clients to whom the employee had access to files (manual or data) while employed at the employer. The courts will typically allow for a period of time during which the former employee is considered to have had an unfair access to confidential information about any clients in the agency. A Non-Piracy clause can also address prospects that the agency has solicited in the recent past (last twelve months) that a former employee could also have had access to non-public information that could cause the prospect to be influenced to do business with a competitor agency. After two years that information that the former employee might have had access is considered “stale” and non-current.
Non-Competition
While employed it is perfectly acceptable to forbid any conflicting employment outside the agency. However, the entire section of Non-Competition within the insurance business for former employees of an agency within a geographic area has been the cause of innumerable lawsuits, most of which have been won by the former employees.
It seems that the attitude of the court is that a Non-Competition Clause that forbids an employee from performing the trade for which the employee has been trained and has experience is an unfair practice that is akin to slavery or indenture. Their attitude is that you can’t stop someone from earning a living doing the only thing they know how to do where they live.
Instead agencies have told former employees that they can certainly work for another agency but they can’t pursue clients and prospects they dealt with previously (Non-Solicitation), other clients of the agency for whom they had access to confidential information (Non-Piracy) or disclose confidential information about clients or their former employer (Confidentiality) for a long enough period that the information is no longer confidential (stale data), already in the public eye, or the former employer has had sufficient time to rebuild relationships with other employees.
Be careful with your wording. Courts have increasingly chosen to simply strike the offending sections of the contracts completely instead of modifying them to a more reasonable measurement or limited scope. It would be better to change your contract to make it more liberal (liberalizing contracts is much easier than tightening them with respect to equitable compensation for contract changes).
If you have any questions or would like Agency Consulting Group, Inc. to review your contracts, call 856 779 2430 or write to al@agencyconsulting.com .