Agent Contracts: Lost Business Reimbursement
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Are Promises that Require an Agent to Reimburse a Former Employer for Lost Business, due to Transferring Clients, Enforceable?
Generally yes. Unlike covenants not to compete, a promise to reimburse for lost business does not prevent an agent's freedom to seek other employment. Therefore, most courts believe that this lack of free trade restriction makes it okay to enforce reimbursement promises. However, there are a few exceptions.
What Types of Exceptions Make a Promise to Reimburse Unenforceable?
Although courts vary on how they choose to regulate reimbursement promises, two main exceptions generally apply:
- The agreement must be part of the initial employment contract: In other words, an agent must make a reimbursement promise before he starts working for his former employer. The reasoning behind this is to make sure a reimbursement promise is made voluntarily, rather than as a forced condition on an agent's continued employment.
- Any reimbursement must be related to the subsequent employment: For example, suppose X works for agency Y selling representation services to star athletes. Now suppose X decides to transfer clients to his own agency, which also provides marketing services. While you can use a reimbursement promise to recover for the lost clients' representation services, they cannot recover for the additional marketing services since it has nothing to do with X's previous employment under Y.
What Other Factors Come Into Play Regarding Reimbursement Promises?
Other factors that may have bearing on a reimbursement promise's enforcement include:
- Whether the promise includes a way to calculate damages from lost clients
- Whether the lost clients were initially signed by the agent or former employer
- Whether the agent purposely worked for their former employer to steal clients
- Percentage of current clients that agent gained from previous employer
How Can an Attorney Help Me?
If you are agency looking to include a reimbursement provision in your employment contracts, an experienced employment contracts attorney can help you achieve this goal. A lawyer can not only determine whether a reimbursement provision is necessary for your business, but can help construct a foolproof provision enforceable in most states.
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Last Modified: 05-31-2012 03:55 PM PDT
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