Non-Compete Agreements It’s common practice for employers to require employees
and consultants to sign 'non-compete' agreements.
I’m frequently asked, 'How enforceable are these agreements?'
Unfortunately, the answer is 'It depends.'
The basic rule is that Non-Compete agreements will be enforced if they
are:
- Fair & reasonable (in scope, duration & geography);
- Protect legitimate business interests; and
- Don’t impose substantial hardship (preclude a person from earning
a living).
What is fair and reasonable? It’s a legal concept that gets interpreted
differently in different industries and locations. For example,
a reasonable term for a non-compete in a traditional company may be one
year. For Internet companies, the reasonable term is becoming
6 months because the technologies and markets are changing so quickly.
Employer Perspective - Less Restrictive is More Effective
Employers are concerned that employees/consultants might:
- Leave & start a competing company;
- Go to work for a competitor;
- Solicit customers; or
- Use and/or disclose company confidential information.
Using a boilerplate agreement, “one size fits all” employees,
is not a good approach.
Employers are usually better served by tailoring an agreement to the specific
employee and identifying the specific business interests that the employer
is protecting (such as customer information, confidential information). Also,
be sure to ask new employees or consultants to disclose the terms of any
prior non-compete agreements.
Further, the non-compete should be clear about the scope of restricted
post-employment activity. For example, listing specific direct competitors
or limiting the applications/markets and time period can help to make the
agreement 'reasonable' and hence 'enforceable.'
The courts are showing a trend of enforcing less restrictive non-competes
and not enforcing broad, boilerplate agreements.
Employee/Consultant Perspective - Be careful what you sign -- the legacy
lingers
Before you sign:
When you sign on to a new job or project, there’s always a lot of paperwork
and it’s easy to sign a pile of documents without carefully reading
the fine print.
The non-compete agreement can limit your future employment choices and may
hamper your efforts to start a company in the future, so read it carefully.
In this tight labor market, employees have leverage in negotiating the terms
of these agreements. Some suggestions are:
- Ask for a shorter time period.
- Limit the geographic area (e.g., 5 miles vs. 100 miles).
- Limit the restrictions to specific accounts, competitors or projects.
If you’ve already signed:
Review the agreement so that you know what you signed.
If you don’t have a copy, request to review your personnel file. (You are
legally entitled to review your personnel file and make copies. It
may feel uncomfortable to ask, but you need to know what’s in the
file.)
For consultants, I recommend adding language to your Independent Contractor
Agreement that states that you agree to preserve the confidentiality of
the hiring company’s confidential information, and that the hiring
company 'acknowledges that you perform similar work for other companies
in the _________ industry and that nothing in this agreement precludes
you from such work.'
In conclusion, non-competes can cloud the future for both employers and
employees and the threat of litigation has an inhibiting effect:
- An employer may be reluctant to hire a prospective employee who is under
the cloud of a prior non-compete agreement.
- A new venture may have trouble launching because of the non-compete cloud.
Reasonable non-competes can protect an employer’s interests without unduly
restricting an employee’s future options.
With this approach (and some practical legal advice), an agreement acceptable
to both parties can usually be worked out.
Jean D. Sifleet
Attorney & CPA
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