Bringing In a New Partner or Key Employee? Why Non-Compete and Non-Solicitation Covenants Matter

Most business owners think about covenants only after someone has already left and taken clients with them. By then, the only question is whether the agreement that was signed years ago holds up. The better time to think about it is before a new partner or key employee starts.

Two different tools

A non-compete limits someone from working for, owning or starting a competing business for a set period and within a defined area. A non-solicitation covenant is narrower. It limits someone from pursuing your customers or recruiting your employees, but still lets them work in the industry.

Both are usually paired with confidentiality terms that protect pricing, customer lists and processes regardless of where the person works next.

Why they matter when you take on a new partner

A new partner or LLC member is not just an employee with a bigger title. They gain access to your customers, your margins, your strategy and often your bank accounts. If the relationship ends, the remaining owners need to know what that partner can and cannot do next.

• Put the covenants in the operating agreement or shareholder agreement, so they apply to every owner the same way.
• Tie them to the buyout terms. An owner who is being paid for their interest should expect reasonable limits on competing against the business they just sold back.
• Match the scope to the business. A covenant that covers the area and services you actually offer is far easier to defend than a blanket ban.

Why they matter for employees

Employees in sales, management, engineering or client service build relationships and learn information your company paid for. Covenants for employees should fit the role.

• Key employees with access to sensitive information may warrant a non-compete, written into an employment agreement.
• Sales and client-facing staff are often better covered by a customer non-solicitation covenant, which protects relationships with less risk.
• Every departing employee can be bound by confidentiality terms, and employee non-solicitation terms limit them from recruiting your team.

What Michigan law requires

Michigan allows an employer to enforce a non-compete that protects a reasonable competitive business interest and is reasonable in its duration, geographic area and type of work. If a court finds a covenant too broad, it can limit it to what is reasonable and enforce it as limited, rather than throwing it out entirely.

Covenants between business owners, and those made when a business is sold, are reviewed under their own reasonableness standards. The law is also under discussion: bills have been introduced in the Michigan Legislature that would sharply limit non-competes for workers, and a federal rule that would have banned most of them was blocked in court and later abandoned. That makes it worth reviewing older agreements from time to time.

A practical checklist

• Decide what you actually need to protect: customers, employees, pricing, methods.
• Choose the narrowest covenant that does the job; non-solicitation is often enough.
• Keep duration and geography tied to your real market.
• Put owner covenants in the governing documents and link them to the buyout.
• Use written employment agreements for key employees.
• Review agreements when roles, ownership or the law change.

If you are the partner or employee being asked to sign, the same questions apply in reverse: what would this actually stop you from doing, and is there room to negotiate? See how we handle non-compete and non-solicitation agreements.

This article is general information, not legal or tax advice for your situation. Reading it does not create an Attorney-client relationship.