Legal Compliance Tips for Startups: Contracts and Clauses

In the ever-evolving landscape of laws, rules, and regulations affecting small businesses, it can be difficult for entrepreneurs to stay focused on their business goals while maintaining legal compliance. This article aims to shed light on current issues related to contracts that startups often encounter.

1. Non-competition clauses are notwithstanding court challenges in many states

Startups commonly integrate non-competition clauses into client and employment contracts as a protective measure. However, the effectiveness of such clauses faces scrutiny, particularly in states with robust employee protection laws. Courts in these jurisdictions tend to be cautious about limiting employees’ ability to work freely and businesses from fully participating in interstate commerce, especially in a post-pandemic economic recovery phase.

Considerations for startups:

• Define your objectives: Clearly articulate your goals in implementing a non-competition clause. Is it a broad preventive measure, or do you have specific concerns about individual employees?

• Follow client-centric ethical practices: Acknowledge that clients have the right to choose their service providers. Cultivate a business environment where clients willingly stay, reducing the need for restrictive clauses.

• Implement restrictive covenants consistently: Apply non-competition clauses consistently across all contracts to avoid potential accusations of discrimination. Fair and balanced contracts are less likely to face legal challenges.

Keep in mind that a Federal Trade Commission ban on non-competition clauses will take effect on September 4, 2024.

2. Restrictions on waivers in severance agreements might mean they are a waste of money

Startups often invest substantial resources in crafting comprehensive severance agreements, including waivers of various claims. Unaware that some claims can’t be waived in this manner, a few startups will first get this information after they are served with notice of a claim and consult an attorney.

Considerations for startups:

• Define waiver objectives: Note that severance pay is not required in the United States or any of its states. Considering that some claims can’t be waived by contract alone, you must clearly understand what you aim to achieve through the waiver,

• Conduct a risk assessment: Assess your vulnerability to potential claims and ensure transparency with your insurance company regarding alleged facts that could lead to a claim. Otherwise, you risk the insurance company denying you coverage if a claim is filed.

• Avoid implicit bias: Implement consistent waiver clauses across all severance agreements to avoid implicit bias and disparate impact concerns.

3. Employers can still include (limited) non-disparagement and other confidentiality clauses

Although the National Labor Relations Board protects employee speech where it relates to the conditions of employment, this does not give employees the right to disclose trade secrets, customer lists, or other confidential information. Nor does it authorize employees to defame or disparage their employers or people within the organization.

 Considerations for startups:

• Protect confidential information: Clearly delineate the boundaries within which employee speech is protected while safeguarding trade secrets and confidential information.

• Define acceptable speech: Ensure that employees understand the limitations on speech, preventing defamation or disparagement within the organization.

• Learn not to take speech personally: Accept that you can’t please everyone. Listen for the hurts you can heal, heal the ones you can, and focus on building a business that people don’t want to leave.

A tailored approach is essential even to contracting. The insights provided here are not legal advice but serve as a guide to identifying areas for improvement. As your startup evolves, consult legal counsel to navigate the complexities of the legal landscape. Your startup will see many changes throughout its lifecycle. Don’t let it reach the end prematurely because you used a “standard agreement” littered with powerless clauses.

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