This article is taken from a brief presentation given to business owners in the Meridian, Idaho area.
Retention
Employers in the knowledge space have fought for a long time to keep talented, knowledgeable and influential employees in their organizations. Knowledge-based employers tend to lose employees to clients, to ambitious former employees who start their own businesses, and to competitors who look to other companies to hire existing talented employees.
As of today’s writing, employers in all industries, not just knowledge industries, are dealing with the continuing departure of employees at all levels.
While recognizing movement, flexibility, and freedom are important to employers, employees, and a strong economy, below are some employee retention tools that can be used to slow the exodus or churn of employees between competitors and to entice employees to stay for the long term or at least long enough to make a lasting contribution.
Noncompete Agreements
In many states, noncompete agreements are permitted in connection with employment agreements, the sale of a business, and in other limited circumstances for key employees. Noncompete provisions are usually included in an employment agreement, as part of a purchase agreement, or as part of other appropriate transactions. Noncompete agreements are not suitable for all employees in an organization, but they are important for key employees who have a truly significant influence on the health and continuation of a business.
In legalese, covenants not to compete will be strictly construed against the employer, must be supported by adequate consideration, must be consistent with public policy, and should be reasonable and no more restrictive than necessary to protect the employer’s legitimate interests.
What this means for employers is that a noncompete agreement should be limited in its length, in geographic scope, and in the scope of activities that are prohibited. The prohibited activities should be directly related to the former employee’s former work activities and should not keep the employee from being able to earn a living entirely.
Noncompete agreements are an exception to a long history of courts refusing to enforce anticompetitive covenants, starting with English law and being passed on to American law. Noncompete agreements should be written with care to ensure that they are enforceable.
Nonsolicitation Agreements
Nonsolicitation agreements are helpful in preventing key employees who play a significant sales role in a business from leaving the business and then soliciting clients of the business on behalf of another employer.
Nonsoliciation agreements are usually part of an employment agreement or severance agreement where the employee agrees not to market to or solicit existing customers of the business. The nonsolicit agreement should also have a limited duration, should be geographically limited, and should only address the business activities that are relevant to the employee’s scope of work with the initial employer.
Overbroad agreements may not be enforced as expected, and, sometimes courts may refuse to enforce extremely broad nonsolicitation agreements as they are a form of noncompete agreement.
No Hire or Nonpoaching Agreements
In knowledge-based businesses, it is common for an engagement letter or agreement to include an agreement between the vendor and client that neither party will hire the other party’s employees who were introduced during the engagement for a period of time. This same approach could be used between contractors and subcontractors to avoid situations where employees shift between the contractor and subcontractor.
The no poach agreement can be included in a construction contract. The scope of the agreement should be limited in duration and based on the employees that are actually involved in performing the agreement between the two parties. Large employers and vendors should be cautious that this practice does not contribute to creating a wage ceiling as this may be seen as an anti-competitive practice.
Competing employers in an industry are not permitted to sign no poach agreements that have the effect of limiting wages and opportunities of workers in the industry. This is considered an anti-competitive practice. The Department of Justice has indicated that it will pursue competing employers who attempt to fix wages in this way.
Employment and Retention Agreements
It is not possible in the United States to compel an employee to work for any given employer. However, employers can use employment agreements to entice workers to stay for set periods of time, rather than leave at a moment’s notice or less.
Employment agreements can contain the following types of provisions, which are often used in various industries to assure that employees are staying long enough to be productive:
- Set a term of employment with a retention bonus that is paid at the beginning or, preferably, the end of the employment period (e.g. 1-year employment term with a $2,000 bonus paid at the beginning of the term to be repaid if the employee leaves early)
- Require bonus dollars to be paid back if the employee leaves early
- Set bonus accruals that accrue over time but do not become available until the employee has remained with the company for a period of time
- Performance based bonuses and additional earnings
Profit share and employee stock ownership plans (“ESOPs”) are other tools that are commonly used in the financial industry to retain employees. Occasionally, contractors and other trade vendors use these tools to encourage long term employment. These plans permit employees to earn additional income based on the overall profitability of the businesses. (Some bank tellers have retired with $1,000,000 in ESOP value following the sale of a bank.)
Soft Factors and Relationships
If you have ever worked for an organization where you look forward to getting up in the morning to go to work, you know that there is more to coming to work than earning a paycheck. Making the workplace a pleasant place to be, showing loyalty to employees, providing a meaningful service, providing opportunities for growth, and cultivating relationships go a long way to retaining employees and healthy working relationships.
We recommend using the above strategies as protective measures, as tools to improve employee retention, and as an addition to good working relationships and a positive workplace culture.
Farley Law, PLLC helps business owners identify business and legal strategies they can use to protect their business and personal assets. If used correctly, proactive legal strategies can help business owners, increase and keep more of their income, avoid losses, and increase peace of mind regarding their business dealings. Have a question or a comment? Send us a note at business@farleylawpllc.com
