The beer industry may be known for its collegial vibe, but with the ever-growing competition for customers, maintaining a competitive edge continues to be critical. As of this summer there were more than 7,500 active breweries and many more in the planning stages.
This crowded field creates two potentially conflicting quandaries for breweries. The first is how to recruit skilled employees who may have a wide range of employers from which to choose. The second is how to protect the information and other elements that help a brewery distinguish itself.
Last year, we saw one very public effort by a brewery (Iowa’s Toppling Goliath) to enforce a non-compete agreement and restrict a former employee from going to work for a competitor. This has left many breweries wondering whether they are striking the proper balance between protecting their information and interests and keeping the brewery an appealing place to work.
There is no question that non-competition and other similar agreements can be a powerful way of preventing competitors from draining a brewery’s talent or information—but at what cost? These types of agreements, which contain what are known as “restrictive covenants,” are targeted at limiting what an employee can do after (s)he leaves the brewery. While they are the norm in some industries, their use tends to be more inconsistent across craft breweries.
So what are some of the biggest things that breweries should keep in mind as they consider whether to ask employees to sign a non-compete or similarly restrictive agreement?
Restrictive Agreements Aren’t One-Size-Fits-All
One of the biggest missteps that a brewery can make in this area is requiring all of its employees to sign the exact same restrictive agreement without taking the time to consider whether doing so is reasonable or necessary. There would be obvious concerns if your head brewer went to work for another brewery, but would you have the same concerns about a bartender or someone who works on the bottling or canning line? What actions are you really concerned about preventing? These are the types of questions breweries need to ask themselves before implementing any restrictive agreements.
Restrictive covenants can pose a barrier to recruiting good employees (who place high value on their rights to change jobs at will). Thus, restrictive agreements should typically only be used where the employee possesses, or will be endowed with, skill, know-how, or information that, if used improperly, could really threaten the brewery’s business interests.
As a general rule, low-level employees should not be subjected to the same types of restrictions as their higher-level counterparts. Similarly, while online or other templates can serve as a useful starting point, they should not be the end point. Each agreement should be drafted with the specific job and the overall nature and culture of the brewery in mind. For example, a brewery that distributes might reasonably want an agreement with restrictions to prevent interference with distribution customers. But a brewery that just serves at their taproom would run into issues (both legal and practical) trying to get employees to sign an agreement preventing them from interfering with that brewery’s customers (which would be anyone who might visit the taproom, rather than a discrete list of distribution accounts).
Know and Assess Your Options
Non-compete agreements are not the only type of restrictive covenants. Moreover, as the most aggressive, they are often not the right fit. Other lesser restrictions can meet the same goals. There are, in fact, four core types of restrictive covenants that an employer can use:
Non-competition provisions, which place limits on where and for whom an employee can go to work after (s)he is no longer employed by the brewery.
Non-solicitation of employees provisions, which prevent a former employee from trying to recruit or hire away the brewery’s other employees.
Non-solicitation of customers or interference with business relationships provisions, which prevent a former employee from trying to encourage those doing business with the brewery to end or change their relationship with the brewery.ADVERTISEMENT
Non-disclosure provisions, which prevent an employee from using or disclosing the brewery’s confidential information.
Particularly when combined with one another (for example an agreement that includes a non-solicitation of employees provision and a non-disclosure provision), the lesser restrictions can successfully target the behavior that a brewery is concerned about while being more palatable for employees. While most folks would at least hesitate before signing an agreement that would completely bar them from taking certain jobs after they leave, restrictions on solicitation and disclosures are more understandable and justifiable to employees and let them retain continued control over their future career paths.
Keep the Restrictions as Narrow as Possible
Hand in hand with the earlier points, the fact that there are multiple types of restrictions available allows breweries to craft agreements so that, for each position, the restrictions are only as broad as necessary to protect the brewery’s core interests. Many employers will use an agreement with non-disclosure provisions as the floor for any employee who might have access to the business’s confidential information and then only add non-solicitation or non-competition for higher level employees who are the ones developing the business relationships or the recipes and methods.
For example, there is no reason for an employee who has no interaction with or relationship with a brewery’s business partners or customers to be subject to a non-solicitation provision because that employee doesn’t have any sway or foundation with the business partners or customers to use to interfere with the existing relationships. On the other hand, if that same employee has access to the list of customers and their order history or pricing schedules, it would be appropriate to subject them to a non-disclosure agreement to prevent them from sharing that information with a competitor or using it themselves to try to draw away the customers by offering better terms.
Implement and Negotiate the Agreements with Caution
The best time to implement an agreement with restrictive covenants is at the outset of the employment relationship. Not only does it ensure that the brewery and the employee start the relationship on the same page, but it helps to make the agreement legally enforceable down the line.
A contract is only enforceable if both parties commit to take some action or give something up (referred to as giving “consideration”). When a new employee signs a restrictive covenant when they are hired, the employee is agreeing to the terms of the agreement while the employer is agreeing to give him/her the job.
Once an employee has worked for the business for some time, establishing consideration to make the agreement with restrictive covenants enforceable gets more complicated. The cleanest approach is just to give the employee a bonus or other type of benefit (such as extra vacation days) in exchange for signing the agreement. In some jurisdictions, the employer agreeing to continue to employ the employee after (s)he has signed the agreement can be sufficient give-and-take to make the agreement enforceable. However, in this situation, if the employee leaves or is let go shortly after the agreement is signed, there may be questions about whether the continued employment lasted long enough after the agreement was signed to be adequate.
In addition, if an employer requests that a group of employees sign restrictive covenant agreements as a condition of their continued employment and one employee refuses to sign, the employer will have to choose whether to abandon the agreement for all employees or let that one employee go. Otherwise, keeping that employee on without him/her signing the agreement will signal that, for the others, signing the agreement wasn’t really a condition of continued employment because another employee who didn’t sign was kept on.
Don’t Forget to Check State Law
State and local laws play a huge role in the crafting and enforceability of restrictive-covenant agreements. Just because an employee signs an agreement doesn’t mean it is permissible or enforceable everywhere.
Some states, such as California, restrict the use of non-competition provisions altogether while others, such as Illinois, prohibit lower paid employees from being subjected to non-competition provisions.
Even where non-compete agreements aren’t expressly prohibited, non-compete agreements and non-solicitation provisions generally need to be narrowly tailored to protect a legitimate business interest and reasonable in their duration and scope. What is considered a legitimate business interest or a reasonable duration and scope will be governed either by state statute or case law or a combination of the two. Before trying to implement any restrictive-covenant agreement, employers are well advised to take a long hard look to make sure that what they are proposing is permitted and enforceable in their state.