EMPLOYMENT AGREEMENTS – DO'S AND DON'T'S

Distinguish between the terms “non-compete” and “non-piracy.” 

In its basic terms, a Non-Compete clause protects the agency against a former employee taking accounts that they produced or for which they were responsible while an agency employee. A Non-Piracy clause protects the agency from a former employee taking any agency accounts, whether or not they were responsible for producing or servicing them.

Do NOT put geographic limitations in the Non-Compete Clause of your employment agreement. 

Courts nationwide have consistently struck down such limits, reasoning that you can't stop a person from working in their profession in their home area. Instead, forbid them to take — or have anything to do with another insurance entity taking — any accounts that they produced or for which they were responsible, or any other accounts that the agency is actively prospecting or that had been lost to the agency in the year before the employee's departure (See #5 below).

Understand the term “employee.” 

Some agencies are so paranoid about their responsibility for payroll taxes and benefits that they'll try almost anything to avoid referring to some of their staff as “employees.” However, the IRS has a basic list of qualifications of employee vs. independent contractor status. If a person working for you “fits” the majority of these qualifications as an employee, the IRS will consider them an employee, whether or not you do. The one notable exception in the IRS code refers to the ability to treat a Life insurance agent (not a P/C agent) as an independent contractor even if they otherwise qualify as an employee.

Include prospects or departed clients in Non-Compete and Non-Piracy clauses.

You spend agency time and money in prospecting. This time and money makes the relationship built and the information gathered agency property even if this information is in the public domain. If a former employee claims that the information is available to the public, let them spend their time and money to gather it again. Any information they gathered while employed by and being paid by the agency belongs to the agency.

Information in your files created during the period that a client was with your agency is both valuable and can be used to re-solicit a departed client if their new agent did not fulfill their promises or cement their relationship with the client. Unfortunately, we've testified as an Expert Witness in several cases that involved a soon-to-leave employee causing clients to move during the year before their departure, assuming that these “former” clients would not be subject to the employee's Non-Compete Clause. If written properly, you can plug this hole and protect clients who have been influenced to leave by any means. Of course, this clause will be far more effective if you have a history of re-soliciting lost clients and refuting efforts of prior employees to “raid” your book of business.

Make sure that the duration of a Non-Compete or Non-Piracy clause is “reasonable.” 

Defining this term has always been somewhat subjective, with defense attorneys claiming that six months was an adequate period. However, we have made strong cases for a minimum two-year Non-Compete and Non-Piracy clause by pointing out that the re-establishment of relationships using other agency employees requires a full policy period (one year) and one renewal process (a second year) to cement. At that point, two things happen. First, the client should have determined that the agency has provided a strong or better replacement for the lost employee. Second, the information available to the employee two years before that point is probably stale and could not be used as confidential information available only to that person because of their association with the agency.

If the agency has not cemented relationships within two years or updated their client information to supercede the data in file before the employee's departure, they should expect to be vulnerable to a marketing attack by the former employee. Courts have also accepted a three-year period for these clauses, reasoning that the prior information doesn't go stale for three years, thus “leveling the playing field” if the former employee wants to compete on an account about which they had confidential information when they were employed by the agency.

If you decide to merge or sell your agency, make sure that your Non-Compete and Non-Piracy Clauses are assignable to the agency buyer. 

Otherwise, you might be seeking approval from producers and other account-servicing employees before you can sell the agency. What happens if they don't want or intend to work for the new agency owner? A sale can disappear quickly if a buyer finds that not only will they lose employees, but that these people will enjoy free rein to compete against the new owners on the very book of business that's being purchased.

If you're buying a book of business or an agency, make sure that the Employment Agreements, or at least the Non-Compete and Non-Piracy Clauses, are transferable. 

If there's any question about their transferability, make the acquisition or merger contingent on getting signed Employment Agreements with specific employees.

An Employment Agreement protects both the employee (who is given specific duties and rights) and the agency. If an agency is being purchased or sold in an asset sale, this protection can become critical — we've seen wholesale departures that effectively ruined a transaction. If the sale involves stock, a strong Employment Agreement can provide a period of transition and stabilization that protects both buyer and seller. Either way, the new owner would be wise to re-negotiate a new Employment Agreement with pre-existing employees, using a legitimate form of consideration (thus avoiding any whiff of coercion).