Non-compete Agreements Protect Your Firm's Most Valuable Assets

Source: The CPA Journal

Authors Michael C. Lasky and David S. Greenberg discuss the importance of noncompete agreements and other restrictive covenants in protecting accounting firms' most valuable assets: Their client relationships and employees. With a focus on New York law, the authors review several best practices, including:

• Choose the protective covenant or combination of covenants that best suits the situation. For example, greater restrictions may be appropriate for partners or shareholders. Covenants include noncompete agreements, nonsolicitation/nonservice provisions, nonraid/nonhire provisions, extended notice provisions (requiring advance notice of resignation), and restrictions in employment agreements.
• Carefully define the covenant's terms and narrowly tailor the agreement so its protection is limited to the firm's legitimate interests. Courts will not enforce covenants that are overly broad (although some courts will “blue-pencil” a covenant rather than throw it out altogether). Again, greater restrictions may be appropriate for more senior employees.
• Damages for violating a protective covenant are difficult to quantify, so include a reasonable liquidated damages clause.
• Periodically review covenants and update them if necessary to reflect changes in seniority or other circumstances. Keep in mind that in many states the law requires additional compensation in exchange for new or more restrictive covenants. In some states, however, including New York, continued “at will” employment is sufficient consideration.
• When hiring new employees, review any protective covenants they have with their previous firms.

For the complete article, read “The Increased Importance of Non-Compete Agreements for Accounting Firms.”

From The CPA Journal, A Publication of the New York State Society of CPAs, June 2012, http://www.cpajournal.com.