Business owners who want to keep key employees for business operations and to plan the owner’s business exit often turn to covenants not to compete (noncompetition agreements) to prevent employees from competing (including taking other employees or customers) after the employee leaves the company.
 
The major obstacles to these noncompetition agreements are:
    •   They are enforceable in limited circumstances because public policy disfavors restrictions upon one's ability to earn a living; and
   •   Employers worry that asking or requiring employees to enter into such an agreement will cause the employees to leave the company to join the competition!

However, with care it is possible to create enforceable non-competition covenants that won’t offend your key employees.
 
In states like Colorado, covenants not to compete are generally unenforceable unless they meet rather narrow exclusions.  One of those exclusions is for executive or management personnel.  There are some specific provisions that must be included for these noncompetes to be enforced and keep key employees happy.
 
First, covenants not to compete will be viewed unkindly by courts and your employees unless employees receive valuable consideration in return for signing the covenant. It is often wise to implement an incentive program for your employees that can serve other goals and this may well be sufficient consideration to satisfy both your key employees and the courts.

Second, noncompetition agreements must be“reasonable.”  The test of reasonableness looks to three general factors:
    •   The geographic reach of the prohibition;
    •   The duration; and
    •   The activities which are prohibited.
 
Geographic Reach -- We must also determine the geographic scope where the employee cannot compete. For example, if your business reach is very local, an effective covenant might restrict a management employee from doing business within that limited area (such as a radius from your address or the county in which your business is located).  This may be more reasonable than describing an entire state or national exclusion.

Duration -- As a general rule, the shorter the term of the covenant, the more likely it is to be enforceable. Of course, a covenant that is too short does not effectively prevent competition. If the covenant restrictions last longer than two to three years, it may go beyond the scope of “reasonable” unless there is a specific circumstance that justifies a longer prohibition.
 
Prohibited Activities -- It is important to limit the restricted activities as much as possible while still ensuring that the employee can do minimal harm to your business if he or she leaves.  Once you have identified specific threats a particular employee can create, our office can draft a covenant that prevents that employee from doing that harm.
For example, you may not be harmed if a management employee leaves your company to  form or join a competitor provided that employee does not solicit your existing customers or take any of your other employees.

Covenants not to compete are also enforceable if they are a condition of ownership in the business.  This may be a tool in providing incentives to your employees to improve the bottom line of your business and stay on as part of your business exit plan.
 
When you have key employees who are critical to the success of your business and your exit from the business, you can use noncompetition agreements and stay incentives together to protect those valued resources.