In November 2012, the Center for American Progress, a Washington D.C.-based independent, nonpartisan educational institute, published a study that 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 include separation expenses, temporary staffing, advertising for the vacated position, and training.
With its proximity to Washington D.C. and the federal government, including the United States Patent and Trademark Office (“USPTO”) in Alexandria, Virginia, and multiple, high-quality universities, Virginia is a highly competitive marketplace for businesses. As a result, 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. However, with such a competitive marketplace, especially with some overly saturated industry areas, comes the struggle to retain quality employees and reduce employee turnover, particularly with employees the business has trained for a particular skill set.
Employers may ask themselves, “can I keep my employee from going to a competitor?” or “can my employee start a competing company? In these cases, an employee often 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 their own business similar to the previous employer and attempts to bring prior co-workers to the newly formed organization. Consequently, it is essential to take precautionary measures to account for such a competitive environment and employee loss to maintain a competitive edge and reduce expense as a business owner.
One of the most essential contractual, preventive measures that an employer can take is to require all employees to execute a written contract before employment that contains
- A covenant not to compete, also known as a non-compete agreement or clause.
- A covenant not to solicit, also known as a non-solicitation agreement or clause.
The Non-Compete Agreement (NCA) restricts the employee both during and after leaving their current employment from starting a competing company or going to the employer to work for a competing company. It includes a well-detailed scope for a limited duration and in a tiny geographical area if drafted well. The Non-Solicitation Agreement (NSA) essentially restricts the employee both during and after leaving their employment from soliciting business from the employer’s customers and soliciting other employees. It includes a well-detailed scope for a limited duration and in a restricted geographical area if drafted well.
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. Many of them are found to be unenforceable entirely or to have unenforceable terms. In the circumstance of a severability clause, they are stricken from an otherwise enforceable contract. This requires the drafters of such contract language to be extremely careful in understanding the current judicial trends so that they can be confident 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.