Beware The Ties That Bind

When H.J. Heinz wooed Daniel O'Neill away from a senior-level job at Campbell Soup, he probably should have known better. O'Neill had signed an agreement with Campbell that prohibited him from working for a competitor for 18 months after his departure, and Campbell wasn't willing to let him go. The two companies slugged it out in court and, in mid-February, reached a settlement stating that O'Neill can't work at Heinz for another seven months. Once he finally takes up his new position, O'Neill must keep a daily log of his business meetings for 11 months (which are to be monitored by an independent auditor) to assure no transfer of trade secrets or confidential information.

Like Campbell, more and more companies are insisting upon--and vigorously enforcing--employment agreements that limit your future career mobility. A few years ago, only the top brass had to concern themselves with such agreements. Today, more midlevel executives are being asked to sign, too. "If you're valuable, companies want to lock you in," says Alan Sklover, an employment lawyer in Manhattan.

SECURITY. Unlike the old employment "contracts" that tied an executive to a company for a period of years, these new agreements offer workers a different kind of security. In this era of white-collar layoffs, most employees want to know what will happen if their job is eliminated. How much severance pay will they receive? What about health insurance, retirement benefits, and other compensation? Employment agreements will generally provide better-than-average severance deals (at least six months' pay for a company vice-president), says Alan Johnson, a compensation consultant in New York.

In return for accepting employment restrictions, you can negotiate a host of other details, says Jack Egan, a partner with Curtis, Mallet-Prevost, Colt & Mosle, a New York law firm. Short of getting season passes to the opera, you can probably win a generous sign-on bonus, stock options, and maybe even have your new employer kick in a state-of-the-art home office. You may also wrangle an employment guarantee. Some agreements still offer term limits. "If you're hired to handle a turnaround situation, you'll want some type of assurance that they don't expect you to do it overnight," says Claire Stoddard, vice-president at Drake Beam Morin, a leading outplacement firm.

These golden handshakes don't come without a price, however. With all the perks, come a handful of restrictive covenants, or clauses, that basically limit your ability to work elsewhere. A "nonsolicitation" clause, for instance, typically prohibits you from stealing the company's clients or recruiting your former employer's staff for a year or two. Some "payback" clauses insist that you not take another job until you have repaid the company any expenses incurred in your relocation and recruitment.

Another less common clause mandates that the company must have an opportunity to match any offer that you get. "If your employer matches the offer, you must remain," says Sklover. "That could make it very difficult to go elsewhere."

Probably the most-read--and, in some cases, misread--section these days is the "noncompete" clause, which bars you from working for a direct competitor should you leave your current post. Generally, that restriction could hold for six months to two years, depending upon your particular agreement. Beyond that time, presumably any marketing and sales plan, product development strategy, or client list that you could divulge would no longer be of much use to any competitor out there.

Don't confuse this issue with a simple confidentiality, or "nondisclosure," clause. This common restriction states that employees shouldn't share confidential company information with outsiders, says Egan, whose law firm insists that all of its employees adhere to the restriction. "We don't want our staff talking in the elevator about the cases we handle," he says.

Noncompetes, on the other hand, are far more stringent and could affect your ability to land a new job. Generally, a noncompete is effective whether your job has been eliminated, you've been fired, or you leave voluntarily. If you have been issued a pink slip, comments Sklover, you could be in a real bind, especially if your job search is limited to just a few potential employers. There are several gray areas, of course. Often you can work for a competitor as long as you are responsible for a completely different product line.

If you do break an agreement, however, your former boss can not only sue but may also be able to get an injunction to stop you from working until the case is resolved. Although laws vary from state to state, most courts will enforce noncompetes--as long as they're reasonable. That means they must limit the time period and territory covered to a reasonable duration and distance. In most cases, five years is too long, says Millicent Meroney, an employment law attorney with Wilson, Sonsini, Goodrich & Rosati in Palo Alto, Calif. But, depending on the nature of the business, your contract could extend quite a distance. A software developer, for instance, can probably restrict your employment in all 50 states.

Just because the company insists that you sign such a clause doesn't mean you're obligated to accept all of its terms. You can negotiate some of the fine points, says Sklover. First, ask that the noncompete be applicable only if you leave your job voluntarily. If you're laid off or fired, says Sklover, it doesn't make sense to prevent you from working elsewhere. Second, ask for a more limited definition of the term "the competition." Some employers will specify their competitors by name. Finally, you should have an attorney review the agreement.

You're most likely to be hit with a noncompete before you sign up with a new employer. But you may be handed one at your present company if you have recently been promoted to a new position, especially if you're now privy to confidential marketing plans. Even if you're already on the job, you should expect some "consideration"--either a salary increase or a significant promotion--in exchange for signing such a clause.

Noncompete clauses are generally found within an employment agreement. But sometimes they're outlined separately or even inserted into a stock option plan. Under the latter arrangement, you could forfeit some of the money earned exercising your stock options should you violate your noncompete. Executives at John Wiley & Sons, a New York-based publishing house, must forfeit the gain received on exercising options made six months prior to their termination, if they leave to work for a competitor. At Texas Instruments, executives may be asked to fork over gains they received during the previous three years.

PROTECTION. Not every company will necessarily stop you from heading over to the competition--even if you've signed a noncompete clause. "They're not always enforced," says Johnson. "Some companies just want to slow you down and make it more difficult for you to leave." Other companies are willing to waive the noncompete as long as you comply with some restrictions. Before David Johnson could take over his current post as CEO of Campbell Soup, he had to wiggle out of a noncompete at Gerber Products. The company obliged--once Johnson promised not to develop baby soups at Campbell.

Still want to jump ship? Ask the company trying to win you over if they will protect you should your former employer enforce your noncompete, says Johnson. Heinz, for instance, picked up O'Neill's legal fees and is paying him a salary for the next seven months until he's free to come to work. If the case goes to court and your new company won't pick up the tab, you could be unemployed for months on end.

The biggest mistake you can make, how-ever, is not to take these covenants seriously enough. When a prospective employer is offering you a healthy bonus and other perks, you might be tempted to sign almost anything, says Sklover--especially if you're convinced there's no way a court will enforce the restrictions. But you'd better think again.

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