To Compete or Non-Compete, that is the Question

The biggest hurdle that I have seen with freight brokers (specifically W2 folks) when it comes to changing companies is their employment terms with their current or past company.  The dreaded non-compete stands in the way.  What is a non-compete?  Do they hold up in court?  Are they a good idea?  Let’s take a quick look at these questions.

*Note – this does not constitute legal advice.  I am not an attorney, nor do I ever want to be (haha).  Please seek your own legal counsel when evaluating your employment options.

What is a Non-Compete?

There are four common clauses in an employment contract that we will look at.  The first two are the big-ticket items, and the latter two are good to understand as well.

Non-Compete Clause:  This clause states that you cannot work for a competing company during or after your employment, usually for a certain timeframe of time and within a certain radius.

Example clause: “You agree that at no time during the term of your employment with the Company will you engage in any business activity which is competitive with the Company nor work for any company which competes with the Company.

For a period of one (1) year immediately following the termination of your employment, You will not, for yourself or on behalf of any other person or business enterprise, engage in any business activity which competes with the Company within ______ miles of the facility in which you were employed.”

Non-Solicit Clause:  This clause states that you cannot solicit any customers (and sometimes employees) of your company after your employment.  It can also state that you cannot solicit them while still employed on behalf of anyone besides your company.  This also typically has a timeframe attached to it.

Example clause: “During the term of your employment, and for a period of one (1) year immediately thereafter, You agree not to solicit any employee or independent contractor of the Company on behalf of any other business enterprise, nor shall you induce any employee or independent contractor associated with the Company to terminate or breach an employment, contractual or other relationship with the Company.”

Confidential Information Clause: This clause states that you cannot share any confidential information, trade secret, proprietary processes, etc. with anyone outside of your company during and after your employment.  This can typically be in perpetuity (forever).

Works Made for Hire Clause:  This clause states that anything that you create (physical or not) while employed by your company becomes owned by your company.  You cannot take it with you after you leave.  For example, if you created a lead generation process, pricing matrix, or marketing material for your company, it stays with them after you leave.

Do Non-Competes Hold Up in Court?

It depends.  Different states have different views on this, and every situation is different.  The reality is most cases do not make it to court.  Legal pursuits cost money for both parties, so most companies prefer to avoid court if possible.  This could mean a few things.  Your employer might hammer you with threatening documents until you give in.  They might try to settle with you outside of court.  They also might not do anything at all.  There are too many factors in each situation to say yes or no on their legal application in court.  I have seen some hold up in court with the employee losing, but even more where they did not hold up or they were amended and settled out of court.

Clauses that are too broad (too long in timeframe or not a realistic radius) will likely be dismissed if they make it to court.  Common non-competes that are included in contracts today are for two years with no radius, and they work simply by scaring employees, regardless of their legal application in court.  Realistic non-competes that are iron-clad typically are six months long and within 50 miles or so.  Again, every state and court will likely treat this on a case by case basis.

Are Non-Competes a Good Idea

If you are a brokerage owner and considering having employees sign these agreements, they tend to be effective because they act as a “scare tactic” more than anything else.  Does that make them right?  Not necessarily.  They are effective in that regard though, so that is important to point out.  As an employee should you sign one?  That all depends, and you might have to as a prerequisite to accept the job.

If you have zero experience in brokerage, it makes sense for a company to want you to leave any business behind once you leave since they paid you a salary and trained you while your grew your business.  I agree on the solicitation clause in a lot of cases, but the competition portion I do not agree with.  This is logistics; no one is reinventing the wheel here when it comes to brokering freight.  Going to work for another company and building a new book of business is not going to kill anyone or any business.

Know what you are signing before you sign anything, and make sure to negotiate anything that is appropriate.  For example, if you bring customers with you to a new company, make sure they are excluded from the non-compete in an addendum.  If you are an agent, never sign a non-compete.  You are not an employee; you are self-employed as a contractor and no one should ever own your business.

So…

What do you think?  Should you compete, or non-compete?

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