A free checklist from Agency Checklists on eight points to consider when dealing with employment contracts and non-compete clauses in Massachusetts. Oftentimes the right legal counsel can help navigate a new owner smoothly through this process avoiding many traps for the unwary. Sound like something you would like to discuss?
If you are asking yourself, “Who might compete with me?” then you may need this checklist. Employees, consultants, producers, prospective buyers, sellers, brokers – essentially anyone that has access to client information, referral sources, your business plans and other proprietary business information are potential competitors of an insurance agency, start-up, carrier, or the like, at some point in time.
1. Without a non-competition agreement, your employee may properly plan to go into competition with you and may take active steps to do so while still employed
You have put your sweat and time into grooming a world-class producer and then he leaves and (figuratively) opens an agency next door using all of the knowledge and skills gained from you. Unfair? Maybe so, but is it illegal? No. Not unless you have a written and signed Non-competition, non-solicitation, anti-piracy or non-disclosure agreement that you can enforce against the former employee.
2. What kind of competition can you legally prevent?
The “competition” that you can legally prevent by a written agreement can take many forms. You have to be clear and specific what activities are prohibited, e.g. opening an agency down the street, soliciting customers, assisting another to solicit customers, etc. You have to remember that if the agreement is going to work for you it is going have to stand up in court.
3. Don’t be greedy. If your agreement is not reasonable, it will not be enforced
A contract that prevents a producer from working anywhere in the state for 10 years after termination will not be enforced. Agreements not to compete must be reasonably designed to protect legitimate business interests and enforcement cannot deprive an employee of his livelihood. Thus, the restrictive time period and geographic area to which the agreement applies must be reasonable. Ultimately, the courts decide what is reasonable.
4. And, don’t overreach either. If you make the agreement too broad it will not be enforced
Define the geographic area to which the agreement applies, e.g. the prohibited activity may be barred in a certain town or towns, or within a certain radius from your agency, within certain industries, soliciting certain specified clients, accepting business from certain accounts even if the account asks. Again, reasonableness is the key.
5. Don’t let the court call a time out. If you make the time period of the agreement too long it will not be enforced
The restrictive time period set forth in the agreement must be reasonable or it may not be enforced. What’s reasonable? There are a lot of legal decisions on what’s reasonable under the circumstances. Ten years has been upheld on a sale and has been struck down in other cases.
6. Give the agreement some teeth
A contract is no good if you can’t enforce it or if it costs more to enforce than you can recoup. A good contract may include provisions regarding recouping attorneys’ fees and pursuing injunctive relief.
7. Show me the money
Nothing is for free. In exchange for execution of the non-compete, there must be some adequate consideration, or financial incentive, to enter into the agreement.
8. Don’t shoot yourself in the foot
Before presenting your best producer something like a 10-year non-compete agreement, consider the possible impact upon morale. You don’t want have your best producer or producers to leave because of your trying to force them to sign an unreasonable non-competition agreement.