Non Compete Enforceability: Everything You Need to Know
Non-compete enforceability depends on the extent of the agreement and whether it will legally hold up if challenged in court. 3 min read
Non-compete enforceability depends on the extent of the agreement and whether it will legally hold up if challenged in court. This type of agreement is made between an employee and an employer and states that the employee will not work for any competitors for a specified time period after leaving the original employer. Non-compete agreements are governed by state law and thus may be enforceable in one state but not in another. In most cases, these agreements are subject to the laws of the state where the employee works.
In addition to restricting where employees can work after they leave the company, non-compete agreements also govern protection of the company's trade secrets. This may include sales strategies, product information, and client lists.
Non-compete agreements must be signed by all parties and limit restriction to a reasonable period, often two years. However, the broad nature of the restrictions in this type of contract is often unenforceable. Some non-compete agreements are useless as they will not be held up by the court, while others effectively protect the employer's interest and help retain valuable employees.
Enforceability of Non-Compete Agreements
Before drafting or signing a non-compete agreement, familiarize yourself with applicable state laws--both those where the work will take place and those where the employer is headquartered. For example, unless they relate to selling a business, non-compete agreements are not legal in California.
In most states, the non-compete agreement cannot be enforced unless the employee receives a payment or benefit in exchange for signing it. Some states only enforce trade secret protection but invalidate work restrictions. About 33 percent of states restrict non-compete agreements and do not enforce them because they prevent individuals from being able to work for a living and support themselves. The employer has the burden of proof to show that the restrictions it has placed on the employee are reasonable.
The states that are most restrictive to non-compete agreements include:
Even in states where non-compete agreements are often enforced, the court limits the restrictions to what the employer can prove is reasonable. Some states will not modify the agreement but simply invalidate it.
Non-solicitation clauses in a non-compete agreement cannot be enforced unless the unauthorized use of trade secrets is involved. In addition to the states listed above, these clauses are unenforceable in:
- North Dakota
Non-solicitation clauses that are enforced must limit the employee from doing similar work to the work they did for the employer; clauses restricting all type of work are usually judged by the court as overly broad.
In most states, trade secrets are only protected if the employer can prove they are truly secret and not available from another source. Geographic restrictions are typically not enforced if they go beyond the area where the employee formerly worked for the employer.
In California, an employee fired for refusing to sign a non-compete agreement may be able to sue the employer for wrongful termination and unfair trade practices. Employers must be sure that an agreement is lawful before asking employees to sign. Restrictions should be limited to those necessary to protect the business and should be appropriate for the person's role.
Common Mistakes Companies Make with Non-Compete Agreements
- The agreement has no consideration and is thus unenforceable. Consideration means the employee must receive a benefit for signing the agreement. This must be something of value such as a raise or bonus, a higher job title, or a specific benefit.
- The agreement is not enforceable because the time period it covers is too long. The period considered reasonable varies by state but typically ranges from 6 months to two years. Longer agreements will likely be found invalid.
- The territory covered by the agreement is too large. The area restricted by the non-compete agreement must be deemed reasonable by the court.
- The same non-compete agreement is used for every employee, or a standard agreement is used without modification for the specific business or industry.
- One party purchases a business without having the person who is selling you the business sign a non-compete agreement.
- Failure to include an assigning clause that transfers the agreement if the business is sold again.
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