In his years in the pool industry, Gary Hohne has faced more than his share of employees who turn out to be bad apples.
Hohne remembers the service technician who got to know the homeowners on his route and soon offered them a discount to move their business to his new pool firm. He recalls the salesperson who directed would-be customers to the firm’s subcontractors instead and pocketed a $1,000 for the “referral.” He knows who escaped with confidential price sheets and client lists.
“I could tell story after story,” says Hohne, CEO of Baltimore-based Hohne Pools, which typically builds 30- to 40 pools annually. “There’s no real answer to it. You just have to watch and be careful.”
Hohne’s experiences illustrate the potential damage that departing employees can do on their way out the door. Even those who leave on good terms walk away with a wealth of information about your company’s business practices, financials and customers.
What can you do? “You can’t guard against someone leaving,” says Christopher Stief, chairman of the employee defection and trade secrets group at Fisher and Phillips, a Philadelphia law firm. But, depending on where you operate, you may be able to use a variety of employment agreements to manage the risk posed by ex-employees.
State law on employment agreements vary dramatically. California, for example, bans non-competes, whereas Florida is generally friendly to such arrangements. Arizona and Texas tend to fall in the middle.
Here are five questions to consider.
1. Who can hurt you the most?
If you think that non-competes are only for top executives at big firms, think again.
“Whether employment agreements are justified has less to do with the size than the type of business and the type of threat posed by an employee’s departure,” says Stief. “Who touches your clients? How big is their book of business? How profitable is it for your company? How portable is it?”
In the pool industry, the answers to those questions often point to service techs, who regularly deal with homeowners on a face-to-face basis. “We have all those documents — non-compete, non-solicitation, non-disclosure — in place, and they’re geared toward protecting our client base and the few trade secrets that our company has at the time when a person is working for us,” says Gary Crayton III, owner of Bay Area Pools & Spas in Tampa. “They protect us from [an ex-employee] actively working to get his old route’s clients. He cannot [legally] target them.”
Other firms choose to focus on those who work in sales or operations. “We always tell people to look at the types of employees you have, think about the different threats they could pose, and tailor their employment agreements accordingly. ... Perhaps everyone has a confidentiality clause, but a salesperson also has an agreement not to solicit clients for a period of time,” explains Stief. “A manager might have to agree not to recruit employees if she ever leaves, and a CEO might know so much that he needs to sign them all.”
The unique concerns and competitive environment leads pool firms to different decisions about who is required to have an employment agreement. At Aqua Pool Dealer in Orlando, which closed in early 2013, company officers and upper management were subject to multiple restrictions, including non-competes, but other employees were not. “Sales and designers are the same. They go where the leads go and the reputation is. If they’re really good, they start their own firms, and good for them if they do,” says Jim DeBerry, former partner of Aqua Pool Dealer and now managing partner of IQ Power, a solar firm in Sanford, Fla. “It stinks to lose a good salesperson, but as long as you have a pipeline of training and ads running, you’ll be fine.”
2. How willing are you to call in the lawyers?
For pool firms that do use non-competes, the next big decision is whether or not to enforce them against a former employee.
At Bay Area Pools & Spas, the answer is generally yes. If an ex-employee goes after clients he’s legally agreed to leave alone, “the lawyers get involved,” Crayton says. “If he steals things when he leaves, then the police and lawyers get involved. ... We aggressively enforce our agreements and prosecute anyone who steals on the way out.”
Others question whether it’s worth the effort. “There are precautions you can take, but at some point, is it really worth the time and ligation to go after somebody? I think it isn’t,” says Kevin Woodhurst, president of Precision AquaScapes in Phoenix. After all, the likelihood of recovering significant money in damages is small, particularly from individuals.
Such cases also have the potential to become a distraction for the company leaders who remain. “We almost always let [people] walk,” DeBerry says. “We could file the injunctions, but for what? ... We’d be wasting our money on attorney’s fees and wasting our time in court when we should be focused on building our brand and raising our revenues.”
3. Do you plan to sell your business?
As you consider employment agreements, you also may want to ask yourself: What do you see as the future of your company? Do you plan to manage it indefinitely? Pass it down to your children? Sell it?
If it’s the latter, you’ll want to talk with a legal or financial advisor how having key employees under contract might affect the valuation of your firm.
“I think there is real value in having employment agreements in place if people are growing a business and think they might want to sell it one day,” Stief says. “Potential purchasers are going to want to know who are the key people and whether they are under contract. It just tidies a company up for sale.”
If you do decide to use employment agreements at your company, it’s generally less disruptive to phase them gradually, with new hires rather than existing employees. “It’s always easier to get them signed at the inception of employment,” the lawyer says. “It doesn’t cost much to get them signed, and you can always make the business decision later not to go after them.”
4. How safe are your firm’s secrets?
Client databases. Sales strategies. Price sheets. When an employee leaves, the last thing you want is for him to share your trade secrets with the competition.
Many firms prevent this by asking their employees to sign non-disclosure agreements. These arrangements require workers to keep confidential business information private, even if they leave for another company. “Most non-competes are illegal and don’t hold weight,” says DeBerry. “I’d recommend a strong non-disclosure and keep your safe information safe.”
What qualifies as confidential business information that legally cannot be shared? That depends. While some pool firms protect pricing and marketing materials, others share those freely with employees who are leaving on good terms.
“If they leave in the right way, I will help them in my office by teaching them pricing strategies, corporate strategies like [finding a] market niche, or marketing and advertising,” says Crayton, who notes that pricing and other previously tightly-held information is now readily available, on the Internet. “The sacred information is client lists, and we protect those.”
Crayton has the right idea about prioritizing his business information. For a non-disclosure agreement to hold up in court, companies must show that they have taken steps to protect what they consider confidential business information. Is access restricted in some way? Is the data password-protected? Is the information truly secret or is it easily accessible to outsiders? Is there real value to the company by keeping the information private?
“Just because a company believes something is a trade secret doesn’t make it so,” Stief says.
5. What else can you do?
So how can you avoid the messy decision of enforcing a non-compete? The answer might be to go back to the beginning, when a candidate applies for a job.
“It’s essential that you have a process,” says Crayton. “Ours is pretty thorough and includes pre-screening, background checks, drug testing and calls to previous employers. Nothing is foolproof, but this eliminates many mistakes before they happen.”
Woodhurst focuses more on personality and character, looking at loyalty, honesty and a commitment to customer care. “I hire from the heart. I look for good people, because you can train them to do anything,” he says. As for encountering bad employees intent on damaging his business, “it’s happened to me, but rarely,” he says. “I’ve always tried to be honest and forthright, and that has served me well over the years.”
Whatever approach you take, though, it won’t entirely eliminate the possibility of an employee going rogue as they leave.
And if an employee goes to work for your competition, take some surprising advice from Woodhurst and seize the advantage. “I love it, actually,” he says. “You know exactly what you’re competing against. There are no surprises.”
If you’re considering asking new or existing employees to sign agreements like these, check with an employment lawyer in your own area first, because state laws do affect these types of arrangements. With that in mind, here are the most common types of employment agreements:
1) Non-disclosure agreements, which require employees to keep a firm’s confidential business information and trade secrets private, even after they leave the company.
2) Non-compete agreements, which say that a departing employee cannot work for the competition, including their own businesses, in a certain geographic area for a certain period of time.
3) Non-solicitation agreements, which prevent ex-employees from directly recruiting customers and employees of their former employer.
