Can You Keep Former Employees From Using or Contracting Your Referral Sources?

You may have heard that as of now, noncompete agreements have been rendered unenforceable by the federal government, at least until challenges to the bar are resolved by courts nationwide. But aside from protecting yourself by restricting where former employees can work, you may also want to protect an equally valuable interest: your referral sources.

Why Protect a Referral Source?

Let’s imagine that your business gets significant revenue from referrals from a particular referring source. You can’t or don’t want to restrict where former employees may work after they leave your employment—but you do want to make sure that if they do leave that they don’t contact, or use, your valuable referring source.

Can You Do It?

There is good news and bad news, when it comes to agreements that prevent former employees from contacting your referral sources after their employment ends.

On the one hand, a referring source isn’t an employee, and you’re not telling your employee where he or she can or cannot work, and so the ban on noncompete agreements doesn’t apply, which would seem to make sure an agreement legal and enforceable-it’s just a contract like any other contract.

But there are few cases that address the issue of enforceability of these kinds of agreements. In one case, the court said that referral sources were not legitimate business interests that could be protected in a noncompete agreement.

But that case dealt with a noncompete agreement, which, by law (when they were enforceable) had to protect a “legitimate business interest.” The case fully analyzed and was based on Florida’s laws on noncompete agreements, which again now are likely invalid because of the federal ban.

The case did not involve a standard contract that was not a noncompete, preventing contact with referral sources. That  kind of contract would not carry the requirement of protection of a legitimate business interest, meaning the case may no longer be applicable to these kinds of contracts.

And—making matters more confusing—another case from Florida did say that referral sources were legitimate business interests that were worthy of protection.

Wording Contractual Restrictions on Referral Sources

The real question may be whether a court reads a restriction on contacting referral sources, as a noncompete, thus invalidating the agreement under the current ban on noncompete agreements. That’s why these restrictions need to be carefully worded.

They should firstly specify the referral source, with a statement as to why the referral source protects a legitimate business interest. This could be that the referral sources are a result of time, money, trial and error, and other efforts by the company to cultivate these sources. Or, the referral sources may be hard to find, or rare, or the relationship between the company and the sources could be ongoing and continuous over an extended period of time.

The contract should also clearly specify that it does not restrict the employee’s right or ability to go or work anywhere that he or she may want to work.

Let us review the contracts and agreements that protect your business. Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today.

Source:

casetext.com/case/hiles-v-americare-home-therapy-inc