Expert: Consuelo Herrera, International Accountant and Fraud Examiner - 9/21/2009

Question
How long after an employee leaves contractor A is it ethical to perform a financial audit of contractor A, if the ex-employee is being hired on a contract basis by company B where contractor A is working?

Answer
Dear Ronald,

Thank you for contacting me.


Coupled with ethical matters is the contract clause that states how long you are prevented for working in the same geographical area,and other variables included in a covenant not to compete. I am aware of many auditors who have been bound by these coventants for two years when working in the same geographical area.

Findlaw Library portrays this situation with respect to an employee and I am including it for your information as I consider it can give you helpful insights.

In brief, the contract should spell out your limitations. Ethical matters are up to each individual because what is right and wrong has a fine line that many times become subjective depending on our interests.

Here is the information related to Covenant Not to Compete from the FindLaw Library.

Best wishes for your success,


Sincerely,



Consuelo Herrera, CAMS, CFE
www.fraudsolutionsinternational.com

Reasonableness of the Restraint

In deciding whether to enforce the covenant, courts will consider whether, based on the specific circumstances, the covenant is reasonably necessary to protect the employer's legitimate business interests, or whether the covenant is too broad and unduly burdensome on the employee. Courts making this determination will evaluate both the duration and scope of the restraint.

Duration. What is a reasonable length of time depends on the particular facts. If the covenant is designed to protect confidential information, then its duration should not extend beyond the time at which the information would be expected to become stale. If the covenant is designed to protect customer relationships, it should not last longer than the length of time reasonably needed to erase the association between the former employee and employer in the customer's mind. Courts routinely find covenants that last one year, and sometimes two or three years, to be reasonable in duration.

Scope. Courts look at whether the geographical area covered is reasonable in light of the interests to be protected. This depends in part on the specific services that were performed by the employee, and the employer's interests that are at stake. As to sales representatives, for example, covenants that apply to geographical areas in which the employees did not work for their former employers are frequently considered overbroad. Courts will generally not restrain a former employee from working in a geographical area in which the former employer does not do business. In the case of sales representatives, the territorial scope of the restraint may also properly be defined by the customers with whom the employee had contact, rather than by geography.

As to managerial and technical employees, courts may enforce covenants that apply in any area in which the former employer competes, if the new position threatens the use or disclosure of the former employer's confidential information. Courts recognize that as to managerial and technical employees, the geographic location where the employee will be working is less important than the services the employee will be providing, i.e., whether the employee is going to be working on similar products or services for the new employer.

Overbroad Covenant. If a court finds the covenant is too broad, it may narrow its duration or scope and enforce it as modified. However, if the covenant is so overbroad on its face that it was clearly intended to prevent lawful competition rather than to protect legitimate business interests, the court may refuse to enforce it at all. For example, a covenant that restrains an employee from competing in any capacity anywhere in the world is more likely to be stricken in its entirety rather than judicially modified. The rationale is that otherwise employers would have no incentive to draft reasonable covenants in the first place, and employees unaware of their rights would assume they are bound by the unenforceable covenants.

Relief

If a former employee is breaching an enforceable covenant, courts will typically enforce the covenant by issuing an injunction restraining the employee from violating the covenant. The court may also award money damages for losses already caused by the breach. Hiring an employee in violation of an enforceable covenant may also subject the new employer to liability for damages, which may include the former employer's attorney fees incurred in seeking judicial enforcement of the restraint. When hiring an employee subject to covenant not to compete, it is therefore important to determine whether doing so will violate an enforceable covenant.

Sale of Business

Finally, covenants not to compete are also frequently used in the context of a sale of a business. The general principle that such covenants are only enforceable to the extent reasonably necessary to protect legitimate business interests applies in the sale-of-business context as well. However, courts apply this standard much more liberally in the sale-of-business context, where enforcement is rarely refused.