You hire someone. You train him. He becomes valuable asset to your company and clients. Then, he leaves the company to work for a competitor or for himself, and to compete against you. To protect your business from this typical scenario, you should include a key provision in your employment agreements: The non-compete clause.
A non-compete clause is a clause that prohibits a former employee from competing against you for a specific period of time, within specific area. This can also be used if you are buying a business (i.e., the seller will agree, for a specific period of time and within a specific area, not to compete with you).
States differ in their enforcement of non-compete clauses and agreements but most, including Colorado, provide that the enforceability of a non-compete clause will depend upon on whether the timeframe and geographic limitations of the clause are reasonable in scope, and whether the clause is necessary to protect the employer’s or seller’s legitimate business interests.
Courts may also consider the general reasonableness of the provision. For example, the following article discusses the recent November 4, 2011 Virginia Supreme Court decision, Home Paramount Pest Control Companies, Inc., v. Justin Shaffer, et al. In that case, the Court found that a non-compete clause was overbroad and unenforceable because it was not limited to services the employee actually performed for his former employer. The Court determined that the non-compete provision was overbroad because it would effectively bar the employee from gaining employment with another company in the same line of business as his former employer even if the employee were hired to perform services unrelated to those he previously provided.
In Colorado, applicable law (C.R.S. § 8-2-113) provides that any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer is void other than the following exceptions:
Any contract for the purchase and sale of a business or the assets of a business;
- Any contract for the protection of trade secrets;
- Any contractual provision providing for recovery of the expense of educating and
- training an employee who has served an employer for a period of less than two years;
- Executive and management personnel and officers and employees who constitute
- professional staff to executive and management personnel.
If the non-compete clause falls under one of the exceptions above, like most other states Colorado courts will review whether the clause is reasonable. In evaluating the reasonableness of the provision, Colorado courts will pay special attention to duration and geographic scope limitations.
Protect your business, your client relationships and the investment you’ve made in training your employees, by ensuring that your employment agreement contains a valid non-compete clause. If you would like more information regarding your company’s employment agreements or non-competition agreements, please contact our Business Law Group partner, David A. Closson at [email protected].