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Important Considerations before Asking an Employee to Sign a Non-Compete Agreement

Last revision:
Last revision: July 10th, 2019
Last revision:
Category: General Business Documents

It's become quite common for employees to be asked to sign Non-Compete Agreements, especially in the age of the internet where information travels quickly and where jobs may only last a few weeks to months. A question for employers to consider, however, is the following: are all of these Non-Compete Agreements enforceable and effective?

Generally, the biggest hurdle to protecting a business through a Non-Compete Agreement (or, informally, "non-compete") is the enforceability (enforceability is the measurement of whether a non-compete will hold up in court). In practice, the question of the enforceability of a non-compete only comes up if the employer and employee are arguing about it in court. Ultimately, a court decides whether the non-compete is valid.

Most often, the guiding principle of the validity of a non-compete is "reasonability." In other words, how reasonable are the terms of the non-compete? Here, we'll discuss important questions to keep in mind and answer prior to asking an employee to sign a non-compete.

Please keep in mind this guide does not constitute legal advice and should be taken as informational only. Additionally, the specific laws on non-competes vary per individual state, as further discussed below. Therefore, it's always a good idea to consult an attorney in your specific state when drafting a non-compete or for any questions, you may have.

 

What is a non-compete?

First thing's first: let's talk about what a non-compete specifically is and what its purpose is. A non-compete is a document generally used by an employer to ensure that during the course of an employee's employment and after they leave, they do not engage in direct competition with the employer. The restriction on the competition can take one of many forms, depending on what the employer is specifically concerned about. Often, non-competes restrict the employee or former employee from working with direct competitors or hiring staff out from under the employer. They may also restrict the employee from utilizing information that belongs to the employer, such as client lists, strategy documents, etc. Generally, this type of information is protected in a Non-Disclosure Agreement, but there can be similar clauses in a non-compete.

Now that we've discussed exactly what a non-compete is, let's talk about questions to consider before asking an employee to sign a non-compete.

 

Are non-competes enforceable in your state?

As discussed above, non-compete laws vary on a state-by-state basis. Some states are more lenient in their treatment of allowable non-competes and others are more strict. That being said, however, there are other states that don't permit non-competes at all. Although this is the exception, rather than the rule, it's important to know if you are in a state that bans non-competes. Otherwise, you'd be doing all of the work to have one drafted, have an employee sign it, and you still wouldn't be protected.

What state's law is applicable will either be dependent on the text of the proposed non-compete (like through a choice-of-law provision, for example) or the circumstances of the employment relationship. Most often, if a choice-of-law provision is not included within the agreement, the state where the employer is based will govern.

The states that currently do not allow non-competes are North Dakota and Oklahoma. California has very specific limits on the type of non-competes permitted. There, non-competes that restrict employees from finding other work after they have left the employer are not enforceable, which, in practice, amounts to a total ban on non-competes.

Even if your state does allow non-competes, it's important to walk through the limitations which may be applicable with a licensed attorney, as what is allowable can often come down to the details.

Final takeaways

1. Non-compete laws vary per state.

2. A couple of states, North Dakota and Oklahoma, don't allow non-competes at all. California, in practice, also restricts non-competes.

3. Check on your state's limitations on non-competes before getting one drafted.

 

Do you have a legitimate business interest to protect?

Before even drafting a non-compete, it's important to ask yourself whether you have a legitimate business interest to protect. In other words, it will never work to have an employee sign a non-compete for no reason (or, just because you think the employee should). To have an enforceable non-compete, you must be trying to protect something like a trade secret, confidential business information, relationships with clients or customers, the goodwill of the business, or even specialized training provided to the employee. You can't simply have your employees sign non-competes because you want to restrict their future employment.

Final takeaways

1. Non-competes can't be signed by employees just because the employer wants to restrict competition.

2. There needs to be a legitimate business interest to protect.

3. Get clear on what that legitimate business interest is prior to having employees sign.

 

Is the non-compete too restrictive in its scope?

If you've decided that you do have a legitimate business interest to protect, the next question to ask is whether the non-compete is too restrictive in its scope. What that means is that the non-compete may be so broad in what exactly it is trying to restrict the employee or future employee from doing that it is no longer valid. The scope of the non-compete works best when it is defined narrowly. In other words, if the employer wants to protect the employee from taking confidential information to specific competitors, it's a good idea to define that confidential information as well as specifically name the competitors. If the employer instead says the employee can't work for any competitor in the field and can't even speak to them, that's probably too broad in scope.

Final takeaways

1. Non-competes must be reasonable in their scope.

2. Make sure your non-compete is not too broad.

3. The employee still needs to be able to find gainful employment after leaving.

 

Is the non-compete too restrictive with the location limitations?

Just like the scope of the non-compete can be too broad, it can also be too broad with respect to its location limitations. Generally, whether the location restrictions are reasonable is dependent on where the employer is located. For example, what may be reasonable in a small town with empty space for miles may not be reasonable in packed Manhattan. Therefore, there's no hard and fast rule about what is reasonable, but it's a good idea to consider just how restricted the employee may be from future employment given the location limitations imposed through the non-compete. If the employee will have to move out of the town or city in order to find gainful work and the employee is not a highly specialized employee, the geographic limitations may be too broad.

The geographic restrictions will also be balanced against the time limitations, discussed further below.

Final takeaways

1. Non-competes must also be reasonable in their geographic limitations.

2. The scope depends on the specific location, type of work, and employee.

3. Make sure your non-compete has narrowly tailored geographic restrictions.

 

Is the non-compete too restrictive with the time limitations?

The final consideration for a piece of the non-compete that may be too broad is the time limitations. It's common to see non-competes restricting what an employee may do for six months to a year after employment. Anything beyond that starts to look a bit too restrictive. Just like with the location limitations, however, the time limitations will be dependent on the type of employee, the type of work, and the employer. Therefore, as in the other parts of the non-compete, there is usually no hard and fast rule on what time limitations are reasonable, although individual states may impose limitations in codified statutes.

Time limitations will also need to be balanced against geographic restrictions, as mentioned above. In other words, if the time limitations are very broad (and maybe, must be broad because of the nature of the employment, as sometimes happens), it's generally not a good idea to have highly restrictive geographic restrictions as well. In that case, the geographic restrictions would need to be narrowly tailored. Conversely, if the geographic restrictions are broad, the time limitations should be narrowly tailored.

Final takeaways

1. Non-competes must also be reasonable in their time limitations.

2. As with geography and scope, the specifics will be determined by the particular location, type of work, and employee,

3. Make sure your non-compete has narrowly tailored time limitations.

 

Was consideration given for the employee to sign the non-compete?

The idea of "consideration" can be a tricky one for non-lawyers to understand. One of the reasons that courts will refuse to enforce non-competes is because the employees did not give consideration. Essentially, consideration is something of value given in exchange for a promise. In this case, the promise is the substance of the non-compete.

For new employees, the consideration is clear: the employee promises not to compete, through the agreement, and the employer is willing to hire the employee. The issue becomes, however, if current employees are asked to sign a non-compete for an employer they've already been working for. In this case, consideration can't be the job, because they were already employed. Many courts have said that continued employment is not enough consideration. Instead, something extra needs to be received, such as a raise, a promotion, or a change in employment status.

Final takeaways

1. New employees are generally determined to have given consideration for signing the non-compete.

2. Current employees, however, need to receive something in exchange for being asked to sign.

3. Common examples include a raise or promotion.

 

Do you have different non-competes for different employees?

Generally, one boilerplate non-compete won't be effective and enforceable if you are using it for every single employee. The idea of a non-compete is, as discussed above, to protect a legitimate business interest and usually, there is something special about the employee. If the employer is using the exact same document, with no edits, for each employee, even the ones in different positions, it starts to look much less like a legitimate need. If non-competes are needed for an employer to protect a legitimate business interest, it's a good idea to make sure each of the non-competes used is tailored to the specific employee and position whenever a new one is signed. If a court battle about enforceability ensues, this makes it less likely that a court will find the non-competes were unnecessary or that they weren't tailored enough.

Final takeaways

1. Non-competes need to be tailored for the individual signing the document.

2. It's not a good idea to use a "one-size-fits-all" approach with non-competes.

3. An attorney licensed in your state is a beneficial choice for drafting the proper language.

 

How will you enforce the non-compete?

Even if the non-compete is necessary, has been well-drafted, and is as tailored and as narrow as possible, you still have to consider how you will enforce it. If non-competes aren't enforced, there is essentially no point in having them. Additionally, not enforcing non-competes at a certain point in time makes it harder to enforce one at a later date.

Deciding how to enforce the non-compete should be done before it is drafted. The reason for this is because the non-compete should contain a choice-of-law provision, which determines which state's law governs the agreement. It should also contain a clause which makes clear what type of dispute resolution will be permitted, whether litigation or arbitration. The non-compete may also contain a liquidated damages provision. A liquidated damages provision is a clause in the agreement which specifies the amount of money the employee will have to pay to the employer in case the non-compete is breached. These are included because it is usually quite difficult to define exactly what the damages were to the employer retrospectively, so most employers protect themselves by adding a specified amount of money that must be paid in the event of a breach.

Final takeaways

1. The non-compete should include a choice-of-law provision.

2. The non-compete should also contain details about the type of dispute resolution that is permitted.

3. Ensure that you are committed to enforcing the non-competes that you request employees to sign.

 

Final takeaways

The decision of whether or not to have your employees sign a non-compete can be a complicated one, especially when the question of what's permissible in the content of the agreement is so murky. However, if you're considering a way to protect your business from competition from previous employees, a non-compete can be a really good option. For any questions, it's a good idea to check in with a licensed attorney in your state to ensure that your non-compete will be effective and enforceable.

1. Ensure that there is a legitimate business need for a non-compete.

2. Make sure the non-compete is narrowly tailored as to its scope, geographic restrictions, and time limitations.

3. Consider how you will enforce breached non-competes and ensure that you have the resources to do so.

 

About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.

 

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