One item that many employers have begun to use extensively with employees is a non-compete agreement. The main goal of a non-compete agreement (“non-compete”) is for an employer to protect its goodwill, trade secrets and confidential information upon an employee leaving that employer and, presumably, working for a competitor of the employer. A non-compete could restrict the former employer from working for competitors within a geographic area for a given amount of time, or, it could simply restrict the employee from sharing any information regarding the former employer, and/or it could restrict the employee from contacting any customers of the former employer. Most often, a non-compete is part of a brand new employee’s offer package. However, a non-compete could be included long after an employee-employer relationship has begun as part of a promotion and/or other incentive compensation plans. This post will discuss how and why non-competes are valid and enforceable.
Necessary and Reasonable
In general, courts disfavor non-competes because they are a restriction on an individual obtaining work. Therefore, courts construe non-competes very narrowly and the terms of the agreement must be considered both necessary to safeguard an employer’s unique interests and reasonable between the parties. Overall, the agreement must not impose any greater restriction than necessary on an employee to protect an employer’s business. To show that a non-compete is necessary, the employer should specify in detail what it is looking to protect, why it is unique to the business, and how the employee directly impacts or is affected by what is to be protected.
Reasonableness: Time
Non-compete agreements must be reasonable in the scope of time the agreement would be enforced, should the employer-employee relationship end. A court would consider the following factors to determine if the temporal scope is reasonable:
- Nature of the employee’s work (i.e., how unique is the work?)
- Time necessary for an employer to train a new employee’s to do the job (i.e., how special is the training?)
- Time necessary to allow customers to become familiar with new employees (i.e., how strong is the relationship between customers and the employee?)
- Time necessary to obliterate the association between the employer and employee in the minds of the employer’s customers
In general, it would be very unusual to see a non-compete last more than one year post-termination. If an employer is looking to have a non-compete that lasts more than two years, then it is because a high-level executive is the employee, it is part of a post-termination severance package or a pay-out package that lasts longer than a year.
Reasonableness: Geography
As with time, the geographic scope of the non-compete must be considered reasonable. Some of the things that a court would take into account would be:
- Employer’s trade area
- Area where employee performed his or her duties
- Employer’s actual business area
- Location of employer’s customers
Keep in mind that, again, the restriction should be specific and consider where the employee’s new employer is located and whether because of emails and the web, if a specific geographic restriction is necessary.
Sufficient Consideration
Since courts are concerned about ensuring that an employee received a valuable present benefit in exchange for the potential sacrifice of future freedom to seek employment, sufficient consideration must be provided when an employee signs a non-compete. Sufficient consideration exists at the time of hire of the employee (i.e., the benefit is new employment). After the employee-employer relationship has begun, then sufficient consideration is found only when an employer provides a benefit beyond those to which the employee is already entitled. Therefore, independent consideration like stock options, bonuses, severance packages, promotions, cash payments. etc. should be provided and it should be clear that those employees that are signing a non-compete get the additional benefits, while those that do not sign a non-compete, do not receive the benefit.
If you have specific questions about non-compete agreements, be sure to contact a local business law attorney in your area.
