Moonlighting on your startup while you have a day job may not be the best move. It could create significant issues for you and your new company. Below are the key legal issues that could have a huge impact on your startup’s viability.
Your employment agreement with your current employer may restrict your activity. Here are the clauses in the agreement that you should be aware of:
- Outside Activities. This clause outlines what types of activities an employee is allowed to engage in outside of their job duties. It aims to prevent conflicts of interest between the employee’s job and any outside activities they may have. It may limit the amount of time an employee can spend on outside activities and require them to obtain approval from their employer before engaging in certain activities. Before starting a side hustle, carefully review any outside activity clauses in your employment agreement, as it may restrict your ability to work on your own business while still employed.
- Non-solicitation. This clause prohibits an employee from soliciting the company’s clients or employees for a set period of time after leaving the company. It is intended to prevent the employee from taking the company’s clients or workforce with them to a new business venture.
- Non-compete. This clause prohibits an employee from working for a competitor or starting a similar business for a set period of time after leaving the company. It is intended to prevent the employee from taking the company’s clients or workforce with them to a new business venture. Before starting a side hustle, carefully review any non-compete clauses in your employment agreement, as it could create significant issues for you and your new company.
The laws regarding non-compete clauses vary from state to state in the United States.
The following states have either limited or banned the use of non-compete clauses in employment agreements to some extent:
- California: Prohibits non-compete clauses entirely, with very limited exceptions for specific industries.
- Colorado: Bans non-compete clauses for employees who earn less than $112,500 per year.
- Illinois: Bans non-compete clauses for employees who earn less than a certain threshold, which is currently $75,000 per year. Limits the use of non-compete clauses to only certain types of employees, such as executives, salespeople and certain professionals.
- Maine: Bans non-compete clauses for employees who earn less than 400% of the federal poverty level per year.
- Maryland: Prohibits non-compete clauses for employees who earn less than a certain threshold, which is currently $15 per hour or $31,200 per year.
- Massachusetts: Limits non-compete clauses to certain industries and may require garden leave in some cases.
- Nevada: Bans non-compete clauses for employees who are not in key positions or have access to trade secrets.
- New Hampshire: Bans non-compete clauses for employees who work in certain industries, such as broadcasting, and limits their use for other employees.
- Oregon: Bans non-compete clauses for employees who earn less than $108,576 per year. Limits the use of non-compete clauses to only certain types of employees.
- Rhode Island: Bans non-compete clauses for employees who earn less than 2.5 times federal poverty line. Limits the use of non-compete clauses to only certain types of employees, such as executives and salespeople.
- Texas: Bans non-compete clauses for certain healthcare professionals.
- Utah: Limits the use of non-compete clauses to only certain types of employees.
- Washington: Bans non-compete clauses for employees who earn less than $116,593 per year, as well as banning the use of non-competes for most contractors.
These thresholds are based on 2023 and will likely rise over time. These laws are nuanced and subject to change, so it’s always best to consult with an attorney to understand the current legal landscape in your state. If you’re looking for counsel, feel free to reach out to us here.
It is common practice for companies to protect their “secret sauce” by including provisions in employment agreements that safeguard their intellectual property. Such clauses may grant the employer ownership over any inventions or works of authorship created by the employee, or that were created while using company resources, equipment or within the scope of employment. Here are some key clauses that could impact a company’s ownership of intellectual property:
- Confidentiality Clauses. These clauses prohibit employees from disclosing any confidential or proprietary information they learn during their employment, such as trade secrets or customer lists. It is essential to carefully review any such clauses in the employment agreement before starting a side hustle, as accidental disclosure of confidential information could cause significant issues.
- Company Invention Assignment Provisions. Under these provisions, any intellectual property created by the employee while employed belongs to the employer. This could result in the company having a claim to the intellectual property of the side hustle. To avoid such legal issues, it may be necessary to delay the formation of the new business venture until the employee is ready to quit their current job.
- Restrictions on the Use of Company Resources. Most employment agreements include provisions that restrict the employee’s use of company resources for personal purposes. If an employee uses company resources such as a phone, laptop, software or tools for their side hustle, it could lead to disciplinary action or termination. Additionally, if any intellectual property is created using company resources, the employer may have a claim to it, which could create significant legal issues for the side hustle. It is important to review any agreements with the employer carefully and avoid using company resources for side hustles whenever possible.
It is possible that an employee may inadvertently build a new company based on intellectual property owned by the employer. If the startup becomes successful, the current employer may sue the startup for millions, so it is important to be aware of these issues and take steps to avoid them.
Proceed With Caution
Due to the challenges outlined above, it is highly advisable to resign from your current job before embarking on a new business venture. While it may be tempting to work on your new startup idea while still employed, doing so may lead to conflicts of interest and other legal issues, especially if it’s in a related industry. Consequently, it is always better to leave your current role before starting a new company.
If you decide to remain in your current job while starting a new company, there are several complicated issues you must consider, ideally with the assistance of legal counsel. These include:
- Understanding whether you are allowed to conduct outside activities and what the limitations are.
- Understanding how your non-solicitation clause limits whom you can work with.
- Understanding how your non-compete clause limits the type of work you can do.
- Understanding what is (and is not) considered the company’s confidential information.
- Understanding what is (and is not) considered the company’s inventions.
- Understanding how you should use (or not use) company resources.
These are just a few of the many issues that require careful consideration if you decide to start a new company while still employed at your current job. If you require assistance to understand the above, feel free to reach out to us here.