Cost of Employee Turnover: Non-Compete Agreements and Non-Solicitation Clauses

 

In November 2012, the Center for American Progress, a Washington D.C. based independent nonpartisan educational institute, published a study which observed the cost of employee turnover to a business, which is the rate at which an employer gains and loses employees. The results were significant. According to the study, on average, companies pay roughly one-fifth (1/5) of an employee’s salary to replace that employee. Such costs consist of separation expenses, temporary staffing, advertising for the vacated position, and training.

 

With its close proximity to Washington D.C. and the federal government, including the United States Patent and Trademark Office (“USPTO”) in Alexandria, Virginia, as well as multiple, high quality universities,  Virginia is an extremely competitive marketplace for businesses.  Virginia is one of the most favorable states to start a business, with Fairfax County being one of the largest and highly employed counties in the Commonwealth.  With such a competitive marketplace, especially with some industry areas being overly saturated, comes the struggle of retaining quality employees and reducing employee turnover, particularly with those employees who the business has trained for a particular skillset.  

 

Employers may ask themselves, “can I keep my employee from going to a competitor?” or “can my employee start a competing company? What happens in these cases is often that an employee leaves a particular organization to go to work for a competitor who is willing to provide a larger salary and compensation package. In other cases, an employee starts his or her own business similar that of the previous employer and attempts to bring prior co-workers to the newly formed organization. Consequently, as a business owner, in order to maintain a competitive edge and reduce expense it is important to take precautionary measures to account for such a competitive environment and employee loss.

 

One of the most important contractual, precautionary measures that an employer can take is to require all employees to execute a written contract prior to employment that contains (a) a covenant not to compete, also known as a non-compete agreement or clause, and (b) a covenant not to solicit, also known as a non-solicitation agreement or clause.  The Non-Compete Agreement (NCA) essentially restricts the employee both during and after leaving his or her current employment from starting a competing company or leaving the employer to work for a competing company, and if drafted well, includes a well detailed scope for a limited duration and in a limited geographical area.  The Non-Solicitation Agreement (NSA) essentially restricts the employee both during and after leaving his or her employment from soliciting business from the employer’s customers and soliciting the employers other employees, and if drafted well, includes a well detailed scope for a limited duration and in a limited geographical area.

 

Does my business need non-compete agreements or non-solicitation clauses?  ABSOLUTELY

 

As a practical matter these agreements or clauses are by no means absolute veils of protection.  They are not perfect defenses and are the subject of constant judicial scrutiny.  In fact, very many of them are found to be unenforceable entirely or to have unenforceable terms, which in the circumstance of a severability clause, are stricken from an otherwise enforceable contract.  This requires the drafters of such contract language to be extremely careful in understanding what the current judicial trends are so that they can be certain the language will be enforceable.  As the study at the beginning of this article suggests, an ounce of prevention today may save you over a fifth of an employee’s salary tomorrow.