Do Non-Compete Contracts Really Work?

Ten years ago, Tom Schmidt, owner of Tom Schmidt’s Urban Retreat in Minneapolis, saw the business that he had worked so hard to build become a “revolving door” for hairstylists and nail technicians.

“We were building a staff and the minute we got them build they saw greener pastures across the street and left, “he says. “We were going down the tubes – we’d build people and lose them, build them and lose them.”

Salon owners everywhere complain they spend an inordinate amount of time recruiting and training staff members. And like Schmidt, they become frustrated when staff members stay just long enough to build their skills and clientele and then move on.

As a result, a small but growing number of salon owners are asking their employees to sign non-compete contracts, agreements in which the employee promises not to open or work for a salon within a certain radius of the salon for a specific time period. Schmidt’s non-compete agreement, for example, specifies that the employee will not open or work for a salon within five miles of his salon for a period of one year.

“I believe that contract is why I’m in business today,” asserts Schmidt, who developed his contract with this lawyer 10 years ago. “My whole business has stabilized and now is thriving.”

Explains Deborah Lodge, an attorney with Patton Boggs, LLP in Washington, D.C., “With a non-compete contract the salon is saying, ‘I trained you and helped you become what you are, you made these contracts, and as a result it’s only fair you agree not to open a business next door that will siphon off my employees.” Lodge developed a non-compete contract for The Salon Association, which offers the contract free to its members.

For Your Salon?

Margo Blue, owner of Margo Blue Hair, Body and Soul in Charlotte, N.C., weighed the pros and cons of a non-compete agreement for seven years before deciding to implement one in her salon.

Like Schmidt, Blue was concerned about staff turnover and what former employees took with them when they left. “Every organization has trade secrets vital to its success.” Blue explains. “Naturally, when someone leaves they take some of that information in their head, but the contract prevents them from taking client lists and worksheets as well.” In addition to a non-compete clause, Blue’s contract includes a confidentiality agreement that states, among other things, that client lists are salon property, and a clause that address repayment of training costs if the employee leaves in a certain time period.

But Joyce Hampers, a practicing attorney and owner of Giuliano’s salon in Boston, Mass., eschews non-compete contracts and confidentiality agreements. “Salons are trying to protect their client lists, and they have the right to do so without these agreements because the lists are their property,” she says. “If an employee takes that list they’re taking the salon’s property.

“We have all or our clients on computer and we code them as to where they come from. If they’re a walk-in or a non-request and the nail technician takes them with her when she leaves, then that’s larceny.” And although she hasn’t yet had to, Hampers is prepared to press criminal charges if someone steals her client list.

“I’ve been involved in defending hairdressers against non-compete clauses and I’ve always been successful. The courts are not sympathetic to a company trying to keep an individual from working.” She says.

Hard to Enforce

Even with a signal non-compete contract in hand and indisputable proof the terms were violated, salon owners often lose when the case goes to court. “In general, the courts take a harsh view of non-compete clauses,” says Steve Burgess, an attorney in Denton, Texas, “because they restrict an individual’s ability to work.”

In fact, some states have outlawed their use, while others restrict when, how, and with whom they may be used. In all states, they must be deemed reasonable by the courts or they will be declared void.

“The basic guideline is the reasonableness of the contract in terms of the geographic area, the time restriction, and the nature of what’s being restricted,” explains Lodge. “If someone is a manicurist and the agreement is restricted to where she performs nail services, that may well be deemed reasonable.”

However, she cautions, there’s no set definition for reasonableness. “For example, with geographic restrictions some courts look at the city limits to determine reasonableness, others look at the country lines while others may look at where the individual business’s client base pulls from.”

In developing a contract, a salon owner should document the geographic area from which her salon draws clients. If, for example, you know your salon pulls clients from a two-mile radius but you specify that a nail technician can’t work within five miles, the restriction is not reasonable. Likewise, if the nail care provider is a cosmetologist and you restrict her from performing any salon services within a certain radius even though she only did nails in your salon, that, too would likely be deemed unreasonable, says Burgess. As for the length of time the person will be held to the agreement, Hampers says three years is the most a salon owner could ask for, but even that would probably be deemed too long.

An employee can be asked to sign an agreement as a requirement of employment, but they are more difficult to enforce with independent contractors, says Burgess. “If a salon owner is simply leasing out space to an independent contractor, what purpose does a non-compete clause have in a contractual agreement for property except to restrict the independent contractor’s livelihood? It will probably be deemed unenforceable by the court.”

Dot Your I’s, Cross Your T’s

Sometimes, it’s not the contract itself that’s the problem, but the conditions under which it is signed. “The reason I lost in the past was not because of the contract but because of how I was handling it. Sometimes I had people sign it in the first week they worked here rather than before they started.” Schmidt says.

“It is a basic principle of contract law that the contract must be based on consideration.” Lodge explains. “There could be a question if an employer just said, ‘I want you to sign this.’ To assure there is some consideration, it’s our general advice that the contract be coupled with a change in circumstance for the employee, such as a promotion or a raise – anything you can point to and say this is in consideration of this new facet of our relationship. You don’t have to do this with a new employee because it’s part of the consideration of employment.”

You do, however, need to give a prospective employee time to think about it and have her own lawyer review it. “We have a long conversation about this agreement,” says Blue. “We tell them what it is and explain the benefits and the obligations. They take it home for a week and then we have a follow-up meeting where we address their questions and give them a date to return it.”

Perception is Everything

In trying to stop the flow of people out of the salon, it’s easy to overlook what a non-compete agreement could do to the incoming flow. “People get scared when you ask them to sign something. It makes them very reluctant to come to you if they have a clientele,” Hampers says.

Blue, on the other hand, says it’s a matter of giving as good as you get. “Once they see all we’re going to offer in exchange, prospective employees are excited,” she says. She also emphasizes the positive aspects of the contract, calling hers a “loyalty agreement.” “In the agreement we define the things they receive under our plan. For example, they get education perks, and they are aligned for partnership pay.”

While all new employees are required to sign the agreement, she made it optional for her current employees. Initially, she encountered some resistance. “This isn’t something you can do overnight; you need to have a series of meetings and explanations,” she says. “We invited our staff to take the agreement to an attorney.”

Not Loved By All

For all the successful non-compete agreements, there are others who see it as an unfair and destructive requirement.

“If someone is asking people to sign a non-compete agreement, I would say it indicates problems with the salon,” says Julie Copprue of Novi, Mich. Copprue signed a non-compete agreement at her first job out of school, and six months later she left the salon. She was offered two jobs: one outside the 10-mile radius stated in her non-compete agreement and one inside it. She was told by the salon that it was OK to take the position inside as long as she didn’t take any clients. So she accepted and was then contacted by the former employer, who threatened to sue, but so far has not taken action.

Likewise, Micki Watts of Grandville, Mich.., left her job as nail department director for a salon chain because she had just had a baby and needed to find a job with more flexible hours and a higher commission. Because she was director for the entire chain, however, she is prohibited from working within 15 miles of any of the chain’s 11 locations for one year. Now, she’s not working at all. “I wasn’t making enough money to pay for child care,” she says. “But the way the contract is written I can’t participates in any business the chain participates in. I can’t do anything until the time runs out.”

Her advice to nail technicians: “Think very, very carefully before you sign. I would never sign one again.”