A Cautionary Tale

Dependable, well-trained employees are a retailer's greatest asset, which is why every owner looks to cultivate one or more key people who know how the business is run. But entrusting that knowledge and "insider" information to an employee can be a double-edged sword. What happens when that employee becomes dissatisfied and turns against you, setting up a competing store based on the experience and contacts they've gained from your business? Here are the stories of two retailers who dealt with the situation first hand.

In Islip, New York, Melinda Canter trained an employee to be what she called "another me" in her store, Only You Personalized Gifts. She'd even confided to the woman her plans to open a second location. But when Melinda attempted to rent the new space she'd had her eye on, she found it already taken. By whom? Her trusted staff member, who hadn't even bothered to quit. In short order, Canter's vendors, mailing lists, and another employee were gone too. The copycat even duplicated Melinda's store layout in the new location.

Further south, in Knoxville, Tennessee, Andrew Morton had trained a store manager for 23 years, grooming him to take over the business when Andrew retired. Years later, Morton hired a friend who'd fallen on hard times. Then, suddenly the two employees — one a veteran and one newly hired — left to open their own, competing store just down the road.

Melinda Canter originally hired her copycat to work part-time. The woman missed many days, either out sick or caring for her children. Nevertheless, she begged Canter to make her a management trainee. Yet even after Canter agreed, the absenteeism continued, and the employee refused to return to part-time work.

Morton's hard-luck employee was the wife of a con artist who'd run a multimillion dollar scam in the area. Several of Morton's friends and customers lost large sums, but Morton helped her, even though it cost him loyal customers.

At one point, Morton's manager came to him and asked for a $10,000 bonus. Morton granted the request, believing he'd use the money for a down payment on inventory when he took over Andrew Morton Gifts.

Both Canter's and Morton's employees befriended another staff member with key experience and training, and took that person with them when they left. Says Canter, "One had the money, the other scooped up all my records because she did all my books."

In addition to lost business, Canter and Morton report strong feelings of betrayal and anger. "I was in shock for about a week," says Morton.

When Canter found out, she almost fainted. "I fell to my knees and wanted to die." Worse yet, after five months Canter wrote her former employees to express her feelings — and she received a police warning not to write again, or be charged with harassment.

It may seem that the police should be brought in to deal with the renegade employees, but in fact they didn't do anything illegal. Unethical, but not illegal. While compassion is laudable on the part of Melinda and Andrew, there were warning flags regarding the two employees they recently hired: one wasn't willing to live up to basic employee requirements, the other came with a lot of baggage. Both were taking advantage of their employers.

Meanwhile, asking for a bonus showed ambition on the part of Morton's manager, but large requests that come out of nowhere, or those not justified by previous performance, should be treated as cautionary signs.

There are two things your employees can take that will hurt your business: vendors and customers. Taking vendors appropriates the hard work you put in to build good working relationships, as well as creating a market for their product in your area. Meanwhile, taking customers removes money from your register.

Of course, customers can shop wherever they choose. But mailing lists and purchase records are confidential information. If you can prove they've been stolen, you may have grounds for legal action. One way to check if your mailing list has been used is to insert dummy names. That's how Canter knew her list had been stolen.

You might also consider password protecting your data. Of course, if employees are inputting the data, they'll have to be able to access it to do their work. In that case, use a security program that monitors your computer. Employees should be notified in advance, and retailers need to balance potential benefits with the cost in money and morale if employees don't feel trusted.

Notify your vendors as soon as you identify the problem, but don't rely on vendor exclusivity arrangements. Many won't grant them, and recent legal cases have called such agreements into question. In Andrew Morton's case, vendors held out for a little while, but his rival now offers every one of his formerly exclusive lines. If vendors can't or won't refuse your competitor's business, ask that they not sell the same items into both stores — and be prepared to reduce your order or transfer to another line if necessary.

Non-compete agreements for employees are legal, provided the duration isn't unreasonable. They're fairly hard to enforce, according to Gifts & Decorative Accessories staffing expert Carol Schroeder, but putting them into employee contracts and handbooks can work as a deterrent. Neither Canter nor Morton had them, but both have instituted them now.

If you do use a non-compete agreement, have employees sign them at the beginning of employment, in the context of a larger agreement. If they sign afterwards or alone, courts may find it unenforceable for lack of consideration. Sample agreements are available on the Internet, but it's wise to have yours written by a lawyer.

However, Carol Schroeder cautions against taking too many precautions, however. While such betrayal can be damaging to a business and personally wounding, it's relatively rare — and letting it cause you to mistrust your employees may do more harm than good. The best revenge, she says, is to outlive them.

In the end, Canter decided that legal action was an uphill battle and a distraction she didn't need. "This experience has made me more creative and more in tune to every aspect of my business," she says. "I felt I had to clean house, and I have. I hired a marketing pro and evaluated every department and product. This experience has made me stronger and smarter."

As for Andrew Morton, three years after he planned to retire he's still going strong.

Any ambitious employee has goals of her own, and no matter how loyal, an employee won't have the same proprietary interest as an owner. One solution is to offer partnership, though such an offer is no guarantee. In any case, it's a good idea to be prepared for an employee's exit plans. A non-compete agreement can help ensure that when they do, it will be far enough away, long enough after, or with different enough products to be a colleague and not a copycat.