Backstabbers: The Risk of Training Your Competition

One of the biggest threats to any growing cleaning company is the skilled cleaning technicians and managers it creates through its training and employee development programs. In essence, every business owner takes the risk of training her own competition with each employee hired, trained and promoted. Katie Lambert of Aloha All Natural Cleaning Service in Hilo, Hawaii, knows this all too well.

When Lambert began hiring her first employees, her sister and guide Laura Smith of All Star Cleaning advised her to have each new employee sign a non-compete agreement before cleaning a single home. That’s just what Lambert did, using a pretty common version from the ARCSI Member Library.

Lambert thought herself exceptionally lucky when an ad she placed attracted a local granite and tile installer (we’ll call him Fred) to join her team. She had him sign the same non-compete agreement everyone else had signed. He displayed a great work ethic and was a detailed cleaner. When Fred asked Lambert to consider hiring his wife (we’ll call her Wilma), she was excited, thinking she’d be gaining a second hard-working and high-performing employee. However, after catching Wilma stealing alcohol from one client’s home and consuming the alcohol while driving to another client’s home, Lambert took swift action and fired Wilma.

Soon after firing Wilma, an alarming trend became apparent. Each time Fred would finish cleaning at a job, the client would call Lambert and cancel their service. After a few of these incidents, Lambert was able to identify the pattern and fire Fred based on violation of his non-compete agreement.

Lambert knew that the couple had already stolen at least three of her clients, but she had concrete proof of only one. She had physically observed the couple cleaning for a realtor whose business she had previously enjoyed. By the time she had fully recognized the extent of the problem, Lambert had lost approximately 25 percent of her business to this couple in a small market of about 40,000 people.

Lambert knew that suing former employees over non-compete disputes rarely resulted in owners recouping their losses. Yet, Lambert chose to take legal action in order to establish herself as a no-nonsense employer among her current employees. 

She filed for $3000 in damages in small claims court where the judge ordered the two parties into mediation. Fred and Wilma knew they’d been caught, and owned up to the one instance for which Lambert had hard evidence. The couple agreed to pay $1000 for this one instance.

Unfortunately, the problem did not stop there. Bad reviews of Lambert’s company began appearing on various websites. The couple even posted a class action lawsuit to CraigsList, claiming that Lambert had mistreated employees and shorted them on taxes. The final straw was when Lambert was served with a lawsuit from the couple claiming that she had faked the non-compete documents that were the basis of her original suit. Lambert counter-sued for libel and false reviews…and won. Though the bad reviews continue to haunt her business, the CraigsList posting has since been removed. Lambert also continues to receive harassing calls from the couple.

Today, when Lambert presents the non-compete agreement to a new employee during orientation, she explains the document and adds, “It happened, I sued and I won.”

In Lambert’s story, it appears that she relied on the non-solicitation of customers to protect her business interests. Coupled with a confidentiality agreement, this is the safest way to employ a restrictive covenant. While “non-compete” clauses are generally frowned upon and subject to considerable scrutiny, non-solicitation clauses are routinely held up as enforceable. The key here, however, is that it is limited to non-solicitation. Ultimately, the client is free to take their business wherever 

they want. 

The bottom line for all restrictive covenants is that the courts have no qualms about striking down agreements they feel to be a restraint on trade and a violation of public policy. In creating these covenants, I highly recommend consulting with an attorney to ensure the proper language is used and the document is not overly broad. Restrictive covenants are one of the most complicated (and litigated) areas of employment law. Do not use forms found on the Internet. Every state varies in its application of the law. Further, do not use restrictive covenants as a way to punish former employees. Agreements should be narrowly tailored to meet the legitimate business needs of the employer. 

Employers have several options available to them to protect their businesses. In legal terms, these are referred to as restrictive covenants:

The traditional “non-compete”, which prohibits employees from competing with former employers. The enforceability of these varies from state to state. Some states ban them entirely as contrary to public policy (California), while other states are more employer friendly. For example, to be enforceable in South Carolina, where I practice law, the non-compete must serve a legitimate business purpose, be narrowly tailored with respect to time and geography, and be coupled with consideration. An offer of at-will employment satisfies the consideration requirement, but demanding that an existing employee sign a non-compete or lose his/her job, would not be adequate unless it was coupled with a significant benefit to which the employee is not entitled (a substantial bonus, promotion, increased salary). South Carolina courts have also ruled that non-competes should generally be limited to two years from the last day of employment and must be limited to the geographic area in which the employee actually performed work for the employer.

The non-solicitation of employees, which prevents the former employee from soliciting and/or hiring employees of his/her former employer for a specific amount of time. The confidentiality restriction, which prohibits the former employee from using confidential, trade secrets of his former employer to compete. The non-solicitation of customers of the former employer’s for a defined period of time. 

It’s always difficult to lose customers to employees who start their own companies, though it’s an inevitable part of doing business in many industries. While a non-compete agreement is an excellent deterrent that will discourage most ethical employees from walking away with customers, pursuing legal action can lead to bad word-of-mouth and in cases like this one, even cause the nefarious former employees to seek revenge with negative online reviews and countersuits.

Another option is to provide stellar service to your customers. Take really good care of your current employees so they’re less tempted to leave. Then, wish your departing employees the best and bid them goodbye. Should you let your new hires know that you “sued and won?” I wouldn’t do that, either. It starts the employer-employee relationship off on a distrustful note. It may be best to say something more in line with, “We have a non-compete agreement, though since we work hard to keep our customers and our employees happy, we hope we don’t ever have to enforce it again.”