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Old 3rd February 2014, 07:49 PM   #1
MAjorDesigns
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Default Non-Compete With Former, Former Employer?

So I'm starting a sole proprietor business for web design, development and hosting. I have a current full-time job and this business I am starting will be a side gig until it proves to be a full time job.

Here's the deal - I do freelance work for my previous employer and we maintained a decent business relationship. His company also does web design, development and hosting. I left his company over a year and a half ago to start working at my current employers who does NOT do web design, development or hosting (its a dedicated IT department for a large company). My previous employer has now heard I'm starting this new business and wants me to sign a non-compete so I don't steal his customers and he can't steal mine (I currently have 2 customers, one of which is a disgruntled customer of my former employer).

This is not something I have to sign, correct? It seems like he's trying to protect his business (which is fair) but I have no intention on torpedoing his business. Just wanted to see if he had a leg to stand on since its been so long since I was employed by him.

Thanks a bunch!

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Old 4th February 2014, 10:31 AM   #2
torka
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You definitely want to consult with a lawyer.

A "non-compete" is for the situation where an employer wants to make sure an employee has access to certain "trade secrets" of the employer... such as a full client list, or the recipe for their "secret sauce"... and the employer wants to make sure the employee doesn't take those trade secrets away and use them to compete against his former bosses.

In order to be valid, a non-compete is limited in both time and scope. So, for instance, an agreement that says you can't open a competing business in the same town as his for a period of one year would probably be enforceable. One that says you can't work at all in the web design business anywhere in the universe for the next 25 years would not be.

Do you know who all his clients are? Do you have access to their contact information? Is that client list treated as a secret, or is the information readily obtainable (say, through a "list of clients" on his website, or through a Google search for every site that has a "design by XXX" link in their footer)? Do you know any proprietary information related to how he designs websites or any other "secret sauce" he uses to make his business stand out from the competition?

It's possible you don't have access to any "trade secrets" of his that would need to be protected. It's also possible whatever knowledge you have would more properly be handled by a "non disclosure" agreement instead of a "non-compete." (The thing about a non-disclosure is that -- unlike a non-compete -- it can cover everywhere, for all time. If somebody gets you to sign a non-disclosure, you can't tell anybody, anywhere, anytime without the other party's permission.)

You're probably considered a subcontractor of his in terms of wage and hour law. (Assuming you're in the USA: does he withhold income tax/FICA/unemployment from your paychecks? Do you get a W-2 at the end of the year? If there are no withholdings and you get a 1099 at year end, then you're a contractor, not an employee.)

One of the basic criteria the Department of Labor uses to assess whether somebody is really a contractor versus an employee is their ability to work for multiple employers. In other words, he can't tell you who you can and cannot work for without jeopardizing your independent contractor status with him. And the DOL is cracking down HARD these days on employers who try to classify people as "independent" for purposes of payroll and taxes, while treating them as "employees" in other respects.

So, assuming you're an independent contractor in relation to him, it could be problematic for him if you sign a "non-compete," because in essence he's trying to tell you who you can and cannot do business with. That's typically the sort of thing an employee would be asked to do. If you're an independent contractor, it's none of his business who else you work for in the future. Keeping in mind that I'm not a lawyer, I'd say probably the best he could do is get you go agree to not actively solicit any of his current clients. You definitely don't want anything in there about future clients.

And you'll for sure want your own lawyer to look over in minute detail any contract before you sign it.

Here's why you don't want to include anything about future clients in the agreement. At some point -- unless you find and exploit a niche market that's he's totally ignoring -- the two of you are going to be competitors for the same client. What happens if you've signed this agreement and you win the client through your superior design skills? Is he going to try to claim this client would have been his but for your "interference" in the potential client relationship?

But there's a larger concern: why is he so worried? He has the longer-established firm. If he's confident in the quality of services he provides, he could easily compete against you without any agreement. Sounds as though he thinks you might be a strong competitor and he's trying to remove you from the playing field before you even get the chance to hold the ball.

So, you need to ask yourself: if he's this paranoid about you "stealing" his clients, how will your business relationship be if you try to continue working for him while simultaneously competing against him? Will you have to walk on eggshells around him? What happens if both of you go after the same client, and the client decides to go with you? Is he going to threaten you with a lawsuit (or even actually file one) claiming you "stole" the client from him?

This is why I strongly suggest you have a chat with a lawyer, and make sure you know where you stand. Perhaps I'm simply projecting from my own personal experience, but this sounds like the kind of situation that has heartache and headaches written all over it...

--Torka

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