No Compete Contracts – The In’s and Out’

April 8, 2008 by Mobile Beat Staff Writer

In my introductory article, I stated that “employee problems” topped my list of headaches when my disc-jockey service evolved from a solo DJ service to a five-system company in the early 1980’s. Numerous employee problems developed that I was not prepared to handle. One of the most significant problems that had to be handled was the time invested in training new DJ’s, only to lose them a few months later when they started their own DJ business. It started when one employee who was hired to cover a prominent night club five nights a week, developed a good relationship with the management of that club. You are probably already predicting the out-come of this story, the DJ was able to negotiate a contract the club directly. Needless to say, my company was out of the picture, and $1,000.00 per month.Numerous other DJ’s quit after several months of service to start their own business, and the problem got to the point that I was questioning whether I wanted to continue operating a multi-disc-jockey service. I was investing approximately forty to sixty hours of my time to train each disc-jockey. Each time I had to hire and train a new DJ, it took me away from other important managerial duties such as marketing, equipment maintenance, etc. In addition, it created a lot of turnover within the company that banquet hall managers who referred us were noticing. In short, it reeked havoc within my company, and I simply was not willing to continue to operate the same way. Something had to give.

I consulted with a very respectable attorney on the subject of No-Compete Contracts. In my consultation, he gave me two options: First, he could develop a short, two paragraph contract that would probably deter most people from violating the terms of the agreement. He explained, however, that in order to plug all of the loopholes, a hat are important for a No-Compete Contract to be legal.

PRINCIPLE # 1 – The basis of the agreement is that you agree to provide the person complete training in the trade of being a mobile disc-jockey in exchange for that person agreeing to not provide mobile disc-jockey services in direct competition with you. This means that you should have an organized training program, complete with a company training manual and all training sessions should be documented as to the date, time, and content of the training.

PRINCIPLE #2 – There is a limit on the amount of time that you can prohibit a person from not starting their own business in direct competition with yours. That limit has been recognized by the courts as two years.

PRINCIPLE #3 – You have to guarantee the person a certain number of jobs annually. You should make this a low number, in the event that you get a marginal employee who performs to a minimally acceptable standard. We guarantee 12 jobs per year.

PRINCIPLE #4 – The “No-Compete” portion of the contract must be limited to the geographic area that you serve. For us, this is a forty mile radius of our home base. This must be spelled out in the contract, and the person must be allowed to quit at any time and start their own business outside your normal area that you provide services. We specifically listed several counties in our contract.

PRINCIPLE #5 – You must provide a “release of obligations” clause for the contract to be legal. This means that you must have an option for the person to “buy out” the contract. In order for the person to be released of their obligations in the contract, they must re-imburse you for the training that you provided them. You must first put a price tag on the value of the training that you provided the person.

I placed a $4,000.00 price tag on my training. That’s probably a little high, but I am not interested in providing an employee with a cheap way to buy their way out of the contract. Whatever price tag you place on the training, you must have a scale that starts with the highest amount, and you must decrease the amount in six month increments. The legal theory is, that while this person provides disc-jockey services for you, they are making you money, and in turn, re-imbursing you for the training that you provided them.

The longer they work for you, the less that they owe you in the form of training re-imbursement. At the end of two years, they complete their obligation to you and can start their own business if they choose.

Our “release of obligations” starts at $4,000.00 on or before six months from the date of the signed agreement. From six months to one year, the value of the training declines to $3,000.00. The value of the training continues to decline until the end of the two year term of the contract.
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LOOPHOLES THAT MUST BE ADDRESSED

First, you must define what a mobile disc-jockey service is, the equipment and technologies.
My contract defines a mobile disc-jockey service as ” providing (i.e., playing through electronic play-back devices and or amplifiers) of any type of pre-recorded music(e.g., through audio tapes, audio records, compact discs, Karaoke, mini-discs, or any equivalent means, whether now existing or hereafter developed), to any public or private gathering of persons”.

Second, you must specifically state in your contract that the prohibited provision of mobile disc-jockey services is not limited to financial gain. In other words, what is to stop the individual from taking money under the table, and claiming that he provided the service for free? The contract must state “whether for hire, or otherwise” to eliminate this loophole.

Third, the contract must specify that it includes the provision of ANY mobile disc-jockey services, whether it is for another DJ Company, a restaurant, etc. In other words, the person can’t have his wife open a mobile DJ service up in her name, and get around their contract obligation.

Fourth, you must have a provision that allows you to terminate an employee “in the event of willful negligence or deliberate disregard for the Company’s Rules, Procedures and Performance Standards without affecting in any way or manner the continuing validity of the Contractor’s(the person who signs the contract) agreement to not engage in the provision of Mobile Disc-Jockey Services under the geographical and duration limitations set forth herein”. What this means is if you have specifically noted in your company training manual that an employee can be terminated if they are late starting the music, you can fire the employee, and that person must continue to abide by the terms of the No-Compete Contract. This means that you have to have a formal company training manual that includes not only the training portion, but any rules and performance standards you expect the person to abide by. This prevents the person from getting out of the contract by performing in a way that makes you fire them.

Fifth, you should have a “severability” clause that basically states that if a court of law finds one portion of the contract unlawful, that the unlawful provision shall not render the whole of the agreement invalid, but shall be severable from the remainder thereof, and that such remainder shall continue in full force and effect”. This part can be used to offer some flexibility in the contract, without jeopardizing the contract as a whole. It allows you to add other custom provisions without having to pay an attorney to decide if they are legal. In my contract, I specifically stated that the person had to give 30 days written notice prior to quitting. I put it in there to make an employee think twice prior to quitting with no notice. One person I know made his contract term four years instead of the two recommended by the attorney. He has no intention of enforcing the contract after the first two years, because he knows that he can’t enforce the agreement after that. It basically buys him some time.

I have used a No-Compete Contract since 1988. To date, I have not had the occasion to have anyone leave my employment and start a new business in direct competition with my company. These dramatic results are directly attributable to an air-tight contract that was designed specifically for my purposes. One issue that should be addressed is what happens when the term of the contract has expired.

I developed a simple “entertainers contract” that uses a lot of the legal language from the original No-Compete Contract, but is based entirely on my agreement to give them a guaranteed number of jobs per year, and a pay raise for their services. This has helped keep the experienced DJ’s on staff well after the term of the No-Compete Contract expires.

A three or four page No-Compete Contract can be intimidating to a new employee. You must carefully explain why such an agreement is necessary in your business. I always tell the story of the person who took over the nightclub that we were providing services for, and the financial impact of that incident. That usually satisfies the new applicant and they have no trouble signing the agreement. I have found that new DJ’s rarely apply for a job with my company with the intention of getting free training so they can start their own business. I believe that most people get excited about the fun job of providing mobile disc-jockey services after they have received the training and worked with the company for a few months.

A No-Compete Contract signed at the first training session prevents the person from starting their own business in your service area and reduces turnover within your company. This allows you to concentrate your time and efforts to providing the best quality mobile disc-jockey services to the customer. After all, that’s why you’re in business, isn’t it?

This article appeared in the December issue of The DJ Times magazine.

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Mobile Beat Staff Writer (228 Posts)

This is the general editors account for Mobile Beat Magazine and Website. Who reads Mobile Beat online and in print and attends Mobile Beat events? DJs, VJs and KJs to start with, especially those who own and operate mobile entertainment services. They provide music, video, lighting and a myriad other entertainment choices for corporate events, wedding receptions, dances and innumerable other gatherings.


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