There are few guarantees when running your own business. However, as soon as you hire your first employee, you are guaranteed to eventually lose them. You hope that former employee leaves on good terms but that’s not always realistic. Even if you ensured the employee was happy and well paid, they may decide to use their knowledge against your business.
A lot of the potential issues can be clearly seen in the most bingeable television show ever created: The Office. Some of these topics can be stuffy and boring, but not when we are talking about Michael Scott. In 201 episodes The Office covers hundreds of potential legal issues.
Former employees create a whole lot of litigation and it’s not surprising to see why. Even Michael Scott grew unhappy with his new boss, Charles Miner, and left Dunder Mifflin to create his own paper company.
Michael Scott took all of Dunder Mifflin’s most valuable information and used it to undercut his former employer. He knew what clients to target, what price he had to beat, and other inner workings of the struggling paper company’s Scranton, Pennsylvania branch. Michael knew he could do exactly what his former employer did, just a little cheaper. He even took Ryan Howard and Pam Beasley to his new company. David Wallace was forced to buy out the company and rehire Michael Scott.
The same principle applies to startups, small businesses, and international conglomerations. Former employees can be a major liability. Similar issues can arise in partnerships, requiring a good operating agreement and buy-sell agreement before problems arise.
What should Dunder Mifflin have done? The following are typically included in an employment agreement but can typically be signed later
A nonsolicitation agreement contractually prevents a former employee from stealing existing clients and employees. Any good CEO knows how long and expensive it can be to find good clients. It can be even harder to find good employees. It would be a nightmare if both were poached by a disgruntled former employee. Every employee should sign a nonsolicitation agreement before they turn into the competition. This agreement would have stopped Michael Scott from poaching Ryan, Pam. Also important is the agreement would have stopped him from stealing Dwight’s clients.
Speaking of competition, a noncompetition agreement prevents former employees from competing against the employer and using the employer’s trade secrets. Trade secrets are very important here as they protect an invaluable amount of business intelligence. Courts are usually skeptical of noncompetition agreements, allowing only those of limited scope, duration, and geographic area.
Dunder Mifflin could have had Michael Scott sign a noncompetition agreement, preventing him from managing or owning a paper company within 20 miles of Scranton, Pennsylvania for the 12 months after quitting. Noncompetition agreements are more targeted towards higher level employees. Dunder Mifflin would not be able to prevent Roy Anderson or Darryl Philbin from working in every warehouse in Scranton. Courts will be reluctant to enforce a noncompetition agreement when it hurts the former employee’s ability to work in their trade or craft.
Assignment and Trailer Clauses
The best employees will create better and easier ways to conduct business. Ryan Howard knew Dunder Mifflin needed to sell paper online. He came up with Dunder Mifflin Infinity, a new way to sell paper to clients. Things didn’t work out, in part to fraud and drugs, turning Ryan Howard into the “fired guy.”
He was fired, but without an assignment clause, he could claim an ownership interest in parts of the website, therefore giving him the legal right to use it. An assignment clause will make the employer the owner of inventions, works of authorship, physical products, ideas, designs, concepts, plans, programs and applications created by the employee. Even though the employee was paid to come up with the idea, it’s not always clear the employer is the owner.
With an assignment clause, Ryan wouldn’t be able to take the website idea immediately over to Staples. When Pam Beasley designed a potential Dunder Mifflin Infinity logo, she would own the rights in the image if there was no assignment in her employment agreement.
A trailer clause is similar to an assignment clause, however, it applies to after the employee leaves the company. An assignment clause itself should end along with their employment. A trailer clause will cleanup and include relevant inventions, creations, and ideas after they leave. A trailer clause can’t extend for long, and it intended to grab rights in things conceived and developed while at their former employer’s.
Be Better Than Dunder Mifflin
While Dunder Mifflin may have started as a construction bracket manufacturer in 1949, there’s no excuse to ignore employment law basics. The same applies to all businesses. The bigger a company grows, the bigger the competition grows. Competitors will look to hire former employees for their valuable company information to gain the edge. It’s no wonder Staples, Office Depot, and the Michael Scott Paper Company cut so far into Dunder Mifflin’s bottom line. The company set itself up for problems by failing to protect itself from former employees.
If you are hiring employees and need to know how to protect your business, contact our attorneys. Spengler & Agans offers a flat-rate legal checkup for startups and business needing a broad, overall legal review of their business and business practices, including employment issues.