Just last month, a friend of a friend told me how his best employees decided to pull a sort of “mutiny,” where they conspired to bad-mouth the owner, set up their own competing company, and immediately solicit all of the the friend’s company’s customers. There are things the business owner can do, sure (lawsuits for defamation, C&D letters, etc.) but things like this are best handled before anything becomes an issue. My advice (not legal advice) is to prepare the business structurally.
Let’s dive in!
Businesses need to make sales, and that usually means there are customer-facing employees. The employees may be making the sales themselves directly, and they may be producing the products or services that your business is selling. Ideally, you want your customers to be loyal to your company, but sometimes they become loyal to the company’s employees, and that can get messy. It’s a double-edged sword, really–you want customers to come back to your business, with its employees, but you want them to stay with the business if those employees leave.
Businesses spend a large part of their budget on marketing efforts, so that they can get customer leads. Those leads are then converted from a marketing lead to an actual sale. Why is this important? If an employee quits and takes your customer list, or even the list of all of the leads you’ve paid for (in marketing dollars), they’re effectively getting all of that marketing for free. If you were to sell your business, a major part of the business sale would be the marketing you’ve paid for–the customer base, the brand recognition, and so on. It’s not “fair” for an ex-employee to get all of those customers without the big investment.
There are a number of contracts you can put together and have your customer-facing employees sign:
These are the most common. Non-solicitation agreements are legally binding contracts that restrict employees (and ex-employees) from soliciting any of your company’s customers, marketing leads, and even coworkers. Different states have varying degrees of what’s doable on these contracts. Georgia allows for 2 years after the employee leaves the business, typically (although that’s dependent on the extent to which the employee worked at the company, as well as other factors).
These typically cover the leads and customer lists themselves, as well as any Intellectual Property (IP), such as company trade secrets, processes, administrative tools, pricing models, and so on. Most companies have a great deal of assets that need to be restricted in this way. If the company were to sell, the items they’re keeping confidential are likely the most valuable bulk of what’s actually being purchased by the buyer. If an employee could just take these things, by working for the company and then quitting, only to set up a competing company and use the confidential items against their prior employer, that would all be a breach of contract.
Not all states allow non-competes, but Georgia typically allows them for 2 years after employment for W2 employees, so long as the scope of the non-compete is reasonable (usually around a 10 mile radius from the business, and restricting companies that were selling the same or similar offerings as the prior one).
In the legal industry, these non-competes are considered the most heavy-handed restrictions a business can put on employees, and it doesn’t always make sense for all employees to sign one.
This usually falls under the above NDA/Confidentiality Section, but it’s worth mentioning here. Many small firms’ entire business value is tied up in their trade secret processes and their customer lists. Normally, the courts respect and enforce these agreements so that ex-employees can be stopped from stealing these when they leave.
It’s best to have a great employment contract signed on the employee’s first day (or within a couple days of) when they start. But, if you neglected to get one signed initially, most state laws do allow a new contract to be signed, with more restrictions, only for “continued employment.” So, the main step is to get the employee to sign the employment agreement. If you don’t have one that was professionally written (by an attorney), you’ll need to get that first. Just last week, I saw an AI-written employment contract with a non-compete that messed up the timing to an extreme degree. (It purported to restrict the employee from competing for the 2 years BEFORE the employee worked at the company! Seriously….)
Call your lawyer! Hopefully, you have an employment contract in place that includes the restrictive covenants that we discussed earlier (non-solicitation, non-compete, confidentiality, and so on). If you do, it’s usually best to accept their resignation and remind them (in writing, usually email) that they have to adhere to those restrictive covenants. This puts them on notice, and you can usually get them to acknowledge those restrictions (which is helpful to your case if it ever gets to litigation).
If you do not have an employment contract with restrictive covenants in place, then the move is often to offer them a sort of quasi-severance payment, in return for their signing a new contract that includes those restricted terms.
Again, what you can and can’t do will largely depend on the agreement (or lack thereof) you have in place with the prior employee. If you do have a signed contract with restrictions, they’re probably in breach of that contract, and you will need to hire a law firm to send a strong Cease & Desist Letter (litigation being the next step).
If you don’t have any signed agreement that would otherwise restrict them from stealing your customers, we’d need to review what agreements you do have, and see if there are any other legal claims you could make (or threaten) against them, such as “tortious interference with business relations.”
The main strategy is to get a contract in place with your key employees–the ones that are customer-facing and could effectively steal your customers.
There are more in depth strategies, though, that we can go over quickly:
As you can see, there’s a load of nuance to these things. Thankfully, we’ve been handling hundreds of these cases every year since 2013, and all of our experience comes with any engagement you do with us! At Sparks Law, we’re easy to talk to, we love business owners and have a live person on the other side of the phone line when you call. Reach out to us today to learn more!
