Jumping Ship: Minimizing the Risk from a Departing Employee

The golf business may never see a more competitive time than that of 2012. All the more important to retain the right employees, but what are your rights if an employee leaves? What if they take your hard earned information with them to a competitor? For this we go to Mr. Rob Harris; lawyer, mediator, golfer. 

We previously have discussed the kinds of issues that golf-related businesses should consider when drafting employment handbooks and structuring contractual agreements with their employees. This post will focus in greater detail on the risks that companies face when an employment relationship terminates, either due to resignation or firing. Golf-related businesses often face competitive risks from the prospect of a former employer working for a competitor.

Here are just a few examples of the kinds of employees that can cause harm if they join a competitor:

1. A sales representative with contact information for hundreds of customers or prospects.
2. An engineer for a golf equipment manufacturer who has knowledge of his company’s methods, formulas and know how.
3. A golf professional who has a substantial reputation and following among the club’s members.
4. A club manager who has a devoted staff that would follow him or her to the ends of the Earth.
5. A principal of a golf course developer who has substantial relationships among the financing community.

Astute companies, mindful of the competitive risks posed by employees who jump ship, plan for such contingencies through the inclusion of appropriate language in employment agreements and handbooks. Before turning to the details, we offer a word of caution. The law applicable to employer-employee relations differs substantially from one state to another. Certain states frown on an employer’s attempts to place restrictions on the freedom of former employees to pursue their careers. Thus, before seeking to implement any attempt to limit occupational freedom, an employer should seek appropriate legal advice to ensure that the desired measures are permitted.

Subject to legal acceptability in a particular state, there are three protective measures companies often take with their employees:

1. a covenant not to compete (sometimes referred to as a restrictive covenant);
2. a non-solicitation provision; and
3. a confidentiality agreement.

We will discuss each of these, in turn.

Covenant Not To Compete
Oftentimes, a company will include in an employment agreement a provision that prevents an employee from accepting a job with a competitor. The restriction lasts for a period of time which, given circumstances, can range from one month to a few years. The geographical scope, based on the nature of the business and the competitive universe, can range from a few miles to global.

There are obvious reasons why a golf-related business may wish to consider including a covenant not to compete in an employment agreement. First, a skilled employee can provide substantial value to a competitor. (Think about LeBron James’ remarks: “I’m going to take my talents to South Beach and join the Miami Heat.”)

A second reason to consider a covenant not to compete is simply to deter key employees from resigning. An employer who has invested time, money and effort to develop an employee and his or her relationships can prolong the employment relationship by including contractual disincentives to resignation.

As noted above, states have different views about the enforceability of restrictive covenants. Certain states hold them unenforceable except in limited circumstances. Other states focus on the reasons for the termination of the employment relationship—an employee who resigns may find it more difficult to escape the restrictive covenant than an employee who is fired by the company. Most states evaluate the enforceability of the covenant based upon its duration and its geographical scope.

Non-Solicitation Provision
Companies often include contractual provisions that prohibit a former employee from soliciting the company’s customers, suppliers or employees. Non-solicitation provisions are especially beneficial to a golf-related business with a substantial sales force. A non-solicitation provision can prevent a salesperson from reaching out to his company’s customers or prospects when he joins a competitive employer.

Non-solicitation provisions also can effectively prevent a popular employee, especially a senior level employee, from taking co-workers to a new company.

Because non-solicitation provisions serve a different purpose than a covenant not to compete, companies sometimes include in contract documents both kinds of provisions. Thus, if a covenant not to compete does not prevent the employment altogether—either because the new company is not deemed to be a competitor or because the period of non-competition has expired—the non-solicitation provision still will provide the former employer with certain protection. Just as with covenants not to compete, courts will review non-solicitation provisions for reasonableness, based on geographical scope and duration. Generally, however, the courts are more deferential to such restrictions as they do not outright prohibit an employee from pursuing his occupation.

Confidentiality Agreements
Virtually all companies have information that is not publicly known and that the company views as confidential. For example, a golf club may not want its competitors to know its list of members, its list of membership applicants, the reasons it rejected the employment application of a candidate for superintendent, or its pricing and payment terms with vendors. An equipment manufacturer has supplier lists and prices, formulas, and know how. A golf course developer will want to safeguard the sources and bases for the data underlying its financial pro forma for a particular opportunity.

To prevent employees from disclosing such information, companies often ask their employees to sign confidentiality provisions or agreements. In most cases, these agreements provide employers with the ability to seek a judicial order to enforce the agreement when a breach occurs or is threatened. Sometimes, an agreement will link the provision to the payment of severance, which can be withheld if an employee breaches confidentiality.

Prudent employers will reinforce the confidentiality provision during an exit interview with the departing employee, to ensure that the employee understands his obligations.

Since confidentiality agreements (except in unusual circumstances) do not prohibit an employee from accepting employment with a competitor, courts are much likelier to enforce them.

Conclusion
Golf-related businesses have a variety of tools to protect themselves from harm that can occur from a departing employee. Choosing among available options should be based on the nature of the company’s business, the particular employee’s seniority and responsibilities, and the legal landscape applicable to the employment relationship.

[This article first appeared on the National Golf Foundation's emagazine, NGF Dashboard. The article may constitute Attorney Advertising in some jurisdictions. It is for informational purposes only and does not constitute legal advice.]

ABOUT THE AUTHOR: Rob Harris is an attorney, arbitrator and mediator who represents and advises business clients regarding contractual and other relationship matters that are critical to their operations. He publishes a website / blog called Golf Dispute Resolution (http://www.golfdisputeresolution.com) that tracks the intersection of golf and law, and managed a Linked In group with the same name. A fuller biography of Mr. Harris is available at http://www.levettrockwood.com and he can be reached at rharris@levettrockwood.com or (203) 222-3122.