bonus: a sample agreement.
“non-compete” and “non-solicitation” are two terms often used interchangeably. though they are similar, there are important differences.
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for the sake of brevity, we use the term “non-competes” to refer to both covenants.
the two groups of personnel for purposes of non-competes are partners and staff. virtually this entire post relates to partner non-competes, which are largely enforceable in courts. the enforceability of staff non-competes has become increasingly uncertain in courts, varying wildly from state to state.
requiring your staff to sign non-compete agreements as a condition of employment is a best practice even if the likelihood of enforcement in your state is questionable. human nature, especially for high-integrity people like accountants, is such that someone who signs a non-compete is less likely to violate the agreement even though its enforceability is uncertain. there are several reasons for this:
- staff feel a moral obligation to honor an agreement they signed.
- most people, particularly staff at a cpa firm, have little appetite for engaging in a legal battle with their firm.
- for most staff, only in their wildest dreams can they envision themselves leaving the firm and having the ability to take clients with them.
many firms don’t require their staff to sign non-competes as a condition of employment. but mps of these firms may attend a conference or network with other mps and learn that it is a good practice. so they may embark on an initiative to get their staff to sign these documents.
be careful. these agreements will be enforceable only if the firm provides meaningful remuneration to the staff in exchange for signing the non-competes. that remuneration has to be meaningful. attorney frank saibert suggests $2,500.
why do cpa firms have non-competes?
cpa firms have significant intangible assets:
- client base and prospect list
- client workpapers and other files, both paper and electronic
- personnel employed
- management and marketing knowhow and overall technical expertise
most likely these assets were acquired over decades, the result of a significant investment of the firm’s money. if a partner or staff person leaves, it’s clearly unfair to the firm to allow them to take these assets without permission. therefore, if someone takes these assets, it is reasonable for the firm to take legal action to stop the person from violating the terms of the non-compete agreement. if the departed person leaves the firm and takes clients, prospects or staff, it is reasonable for the firm to sue for liquidated damages.
attorney peter fontaine points out that in some cases, courts see a flip side to this argument – the harm to the departed person in terms of:
- making it difficult for the person to earn a livelihood
- being anti-competitive
- impeding the person’s professional growth and mobility
- being inconsistent with evolving social and workforce trends
and so the battle rages over non-competes.
state vs. federal law
the enforceability of non-competes is governed much more by state than federal law. and state laws on non-competes vary, sometimes substantially.
peter fontaine adds: “courts may invalidate restrictive covenants if the firm coerced a person into signing the agreement, did not explain the agreement to the person, did not encourage the person to seek legal counsel or did not permit the person to negotiate the agreement.”
two different but related terms
this post is about non-compete and non-solicitation covenants, two terms often used interchangeably despite important differences. i could explain these differences with pages and pages of text, but i’ll spare you that with this summary:
- non-compete agreements prohibit departed personnel from providing cpa services within a geographic area, usually defined by a certain number of miles from the firm. this holds true regardless of whether people form their own firm or join another firm. non-compete agreements address a departed person working within the protected geographic area; they have little to do with whether clients or staff were actually taken.
non-competes may be non-enforceable because (a) they prevent the departed person from earning a livelihood and (b) it can be difficult for a firm to prove that it suffered a financial loss merely by the departure of a firm employee who takes no clients or staff.
- non-solicitation agreements prohibit departed personnel from taking clients or staff when they leave the firm. this includes the following provisions:
- the agreement is enforceable even if the employee takes clients he or she originated while a member of the firm.
- the agreement is enforceable whether the employee solicited the clients (directly or indirectly) or the clients came to the staffer without any solicitation.
if the agreement is violated, departed personnel must pay for clients and staff taken.
taking clients and staff
most people think non-competes apply to clients only. but they apply equally to taking staff if so stipulated in the agreement.
the decades-long shortage of qualified staff at cpa firms is not expected to end any time soon. firms invest significant dollars in recruiting and training personnel. when a person leaves the firm, recruitment and training begin anew.
when departed personnel take a staff person, this results in substantial financial hardship and expense to the firm. therefore, it’s reasonable for firms to legally prevent staff to be taken by a departing firm member and to expect liquidated damages.
can firms impose damages in excess of one times fees for violation of non-solicitation agreements?
mostly yes, says attorney russell shapiro. “as long as the industry standard for valuing deferred compensation hovers in the one times fee range, firms are safe with a 100 percent valuation for purposes of assessing liquidated damages, even if their valuation for internal retirement purposes is less than one times fees. in fact, they can safely exceed one times fees if they are more profitable than an average firm, though 150 percent of fees is probably as high as a firm should go.”
what about the damages for taking staff?
we haven’t seen any legal recommendations on this. in practice we see firms provide for damages that range from 30 percent to 100 percent of the salary of the departed staff person. firms that opt for 30 percent select this percentage because it’s similar to the fee commonly charged by search firms. firms that opt for 100 percent feel that losing a staff person is just as harmful as losing a client.
the enforceability of non-competes
are non-solicitation agreements for staff enforceable? some states will enforce a properly written non-solicitation agreement, while others will not. in illinois, for example, the legality of these agreements is usually upheld as long as the provisions are not onerous.
peter fontaine is a bit more skeptical about enforceability. he says, “nationally, legislatures and courts have developed a growing dislike for restrictive covenants.”
fontaine adds, “withholding payments due the partner or staff is acceptable, but avoid being overly aggressive.”
sample non-solicitation agreement for partners of cpa firms
marc rosenberg and the rosenberg associates are not attorneys and do not hold themselves out to be attorneys. this agreement has been crafted from similar agreements we have seen throughout 20-plus years of consulting to cpa firms. the laws applicable to non-solicitation agreements vary from state to state. before using this document at your firm, we strongly recommend that you consult an experienced attorney who is knowledgeable about non-compete and non-solicitation agreements in your state.
confidential and unique knowledge afforded by being a partner of the firm
the partner acknowledges that the firm, from the inception of its business, has developed special, confidential, unique, extraordinary and valuable knowledge, skill, expertise and experience in all aspects of the practice of public accounting, business and tax planning and general consulting services, including the management and marketing of the firm and methods used to procure clients. these critically important assets of the firm were created and developed by the firm over many years at great expense, time and effort.
partners of the firm and other firm personnel benefit substantially from access to these proprietary assets, which include:
- secret, proprietary trade practices
- time-tested management strategies, business plans and designs
- design of programs, procedures and practices used in the performance of the firm’s services
- invaluable experience and knowhow in the training of firm personnel in attracting clients
- sales and marketing methods and tactics
- knowhow in the effective use of technology to provide more efficient and better service to clients. this includes a substantial investment by the firm in the training of all firm personnel in the effective use of a wide variety of software and hardware technology.
- extensive technical and interpersonal (soft skills) training
- development and implementation of a marketing plan
- hiring of marketing consultants to assist the firm in the creation and implementation of the marketing plan
- hiring of marketing support personnel to create name recognition in the marketplace and perform other marketing duties in the firm
- the time allotted to firm personnel to network with prospective clients, existing clients and referral sources, including entertainment activities, some of which were quite substantial
- training in the selling of professional services
- promotional literature such as newsletters, seminars and workshops, publicity in various media, etc.
- direct mail programs designed to generate sales opportunities for partners and other firm personnel to procure clients
- advertising and branding to generate name recognition for the firm
the partner further acknowledges that the firm has expended substantial time and funds in developing the critical assets above for use in developing the firm’s (a) clientele and their patronage, (b) referral sources, (c) long-standing reputation in its markets and (d) professional staff.
with regard to the firm’s professional staff, the partner acknowledges the substantial investment made by the firm in recruiting, training, developing and motivating cpa firm personnel. these investments include
- formal classroom training, both internally and at outside seminars and programs, all of which were paid for by the firm
- extensive on-the-job training and experience
- extensive personnel mentoring and performance feedback programs
- substantial fees paid to search firms to recruit new personnel
- substantial amounts of money paid to personnel to attend outside education courses, seminars and conferences
- large sums of money spent providing social events and other indirect benefits, such as paying for the technology required for personnel to work at home via the internet
as a result of partners’ role in the firm, partners acknowledge that they have access to and become familiar with:
- the present and prospective clients of the firm
- the firm’s referral sources
- the firm’s staff
- the firm’s methods and techniques of doing business and the firm’s proprietary methods of marketing and procuring clients
- the firm’s proprietary management practices
the partner further acknowledges that access to the above information is generally not known in the public domain. each partner recognizes the value of the special, unique and extraordinary knowledge and skill required to accept and perform the type of work normally undertaken and performed by the firm’s partners. each partner acknowledges that the disclosure of and use by any such information to people outside of the firm would substantially and irreparably damage the interests and the value of the firm. accordingly, by entering into this partner agreement, the partner unconditionally agrees to be fully bound by all the terms and conditions of this agreement.
prohibitions
the partner hereby agrees that for a period of (a) x years (amount to be determined based upon attorney’s advice) after the partner’s withdrawal or expulsion from the firm, and (b) in the case of a partner retirement, throughout the period during which partner retirement payments are made to the retired partner, he or she shall refrain from the following:
- providing any services or products (as defined earlier), either voluntarily or involuntarily, either on partner’s own account or as a member of a firm, or on behalf of another employer, to any person, firm, association, trust or corporation who is or has been (a) a client of the firm at any time during the x years prior to partner’s termination from the firm, or (b) a potential client of the firm where there has been direct communication, evidenced by a written or oral proposal during the 12 months prior to the partner’s termination from the firm
- soliciting any party described earlier in this agreement for the purpose of providing any services or products, as defined earlier in this agreement, whether or not previously provided by the firm
services provided to clients include, but are not limited to,
- audits and other attest services
- expressing any opinion in writing with respect to any kind of financial statement or report
- compilations and reviews, or any form of financial statement or report
- bookkeeping and other paraprofessional services
- tax return preparation and representation before the irs
- tax advice, consulting and planning
- estate planning
- investment and other financial planning advice
- budgeting
- other consulting services not listed above
- anything that adversely affects the firm’s independence for any client at the time of the partner’s termination from the firm
- with the understanding that all files of the firm, especially those pertaining to clients and prospective clients, are the exclusive property of the firm, partners are expressly prohibited from removing from the firm’s offices, without approval of the managing partner, any and all files, including hard copies and computer files. in addition, partners are expressly prohibited from making copies of these files.
- regarding the firm’s proprietary cpa firm work methods, technology practices, management and marketing practices, partners are expressly prohibited from removing from the firm’s offices, without approval of the managing partner, any and all files, including hard copies and computer files relating to this proprietary information. in addition, partners are expressly prohibited from making copies of these files.
- partners are expressly prohibited from hiring, retaining, employing, working with, soliciting or encouraging any person who has been an employee of the firm during the x years prior to the effective date of this agreement.
penalties for violations of this agreement
in the event that a partner violates the terms of any part of this agreement, the firm has the right to apply to any court of competent jurisdiction for an injunction restraining the partner from further violation. the partner further agrees to pay on demand to the firm liquidated damages for any violations of this agreement as follows:
- clients. for violations relating to clients of the firm, the damages shall be the sum equivalent to ____% of billings by the firm or any of its affiliates to the clients taken by the partner. the computation of the “billings” shall be the higher of billings during the 12 months prior to the partner’s departure from the firm or the 12 months after he or she departs. this calculation shall be made on a client-by-client basis. payment shall be made in full during the 12 months after the partner leaves the firm. the 12-month period shall begin on the earliest of the day the departed partner begins work with the clients or the day the firm becomes aware that the clients will use the partner to service their accounts. payment shall be 100 percent of the amount due, payable on the date of the partner’s departure from the firm. if the partner so wishes, he or she may pay the amount due over a 12-month period, on a monthly basis, with interest payable at the prime interest rate.
- prospective clients. for violations relating to prospective clients of the firm, the damages shall be the sum equivalent of ______% of billings taken by the partner. the computation of the “billings” shall be the higher of billings during the 12 months prior to the partner’s departure from the firm or the 12 months after he or she departs. this calculation shall be made on a client-by-client basis. payment shall be 100 percent of the amount due, payable on the date of the partner’s departure from the firm. if the partner so wishes, he or she may pay the amount due over a 12-month period, on a monthly basis, with interest payable at the prime interest rate.
- staff. for violations relating to the employment of the firm’s staff, the partner agrees to pay the sum equivalent to ______% of the annualized compensation package, including salary, bonus and benefits earned by the employee solicited for employment or association by the partner. the annualized salary, bonus and benefits, for purposes of this agreement, shall be the higher of the these amounts as of the date the employee leaves the firm or these amounts payable at the employee’s new firm. the entire amount is payable immediately.
whether the partner personally directly or indirectly solicited clients, prospects and staff is not the sole criterion for determining the extent to which a violation occurred. the key is that the firm’s clients and prospects were serviced by the partner and the staff was hired by the partner staff, regardless of any direct or indirect solicitation by the partner.
violation of this agreement shall result in the immediate forfeiture of deferred compensation owed to the departed partner. the partner’s capital shall be withheld to cover any amounts payable to the firm resulting from violations of this agreement and any other amounts the partner owes the firm.
attorneys’ fees
in addition to the damages stipulated in this agreement, the partner agrees to pay any attorneys’ fees incurred by the firm to enforce this agreement or to defend against any declaratory judgment action brought by the partner concerning it.
witnesseth the hands and seals of the parties hereto the day and year written.
by: ________________________________________ date:_________________
partner
by: ________________________________________ date:__________________
the firm