How Do Non-Compete Agreements Work and What Makes Them Enforceable?

Business.com / Legal / Last Modified: June 28, 2017
Photo credit: de-focus/Shutterstock

Understanding non-compete agreements can be overwhelming. This article addresses the general aspects of non-compete agreements and the legal intricacies behind them.

Employment law encompasses a wide variety of state and federal rules. It addresses issues ranging from workplace safety to wrongful termination. Numerous laws safeguard the rights of staff members, while others protect businesses from unfair or irresponsible behavior. Non-compete agreements have become an increasingly important and controversial part of employment law. Some people refer to them as "restrictive covenants" or "non-compete covenants." Employers must prepare these agreements carefully to avoid costly legal pitfalls.

Purpose

A non-compete policy may appear in a separate agreement or one section of a lengthy employment contract. When people sign the document, they pledge to avoid working for competitors until a certain number of months or years have elapsed. The covenant often applies to the specific geographic area that a business serves. Non-compete agreements became increasingly common during the last two decades. Around 20 out of every 100 U.S. citizens have signed contracts that remain in effect. Almost twice as many people sign at least one agreement before reaching retirement age.

Why do more and more organizations want workers to accept restrictive covenants? Most of them seek to prevent staff members from divulging trade secrets or attracting familiar clients to a different firm. For example, a soup company doesn't want an employee to reveal its recipes to a rival. The same goes for proprietary chemical formulas, program codes and manufacturing techniques. These agreements also stop people from starting new enterprises that compete with their former employers.

Enforceability

An excessively restrictive agreement holds little value. Most courts won't enforce the contract, and it might scare away desirable employees. The justice system expects businesses to develop reasonable non-compete policies. Among other things, this means that an employer must be able to justify a contract's requirements. The agreement shouldn't only exist to discourage workers from leaving a company. It ought to safeguard specific information that genuinely benefits the employer and isn't easily accessible to the public.

Likewise, a reasonable policy doesn't remain in effect for more years than necessary. Few courts will uphold a covenant that prevents staff members from competing with a business for a decade or longer. If an agreement lasts three or more years, a judge will probably scrutinize it more carefully before deciding to enforce or dismiss the contract. The most suitable time span varies depending on the industry and job responsibilities.

An enforceable agreement must pertain to an appropriate geographic region. The contract should only stop people from competing with a company in areas where it normally conducts business. For instance, a local newspaper publisher in Albany can take legal action against former employees who start a new publication without leaving the city. It could do the same if they gain employment at an established paper in nearby Troy. On the other hand, it can't prevent them from working for newspapers in Memphis or San Antonio.

Compensation

Courts expect employers to reward individuals who sign noncompete agreements. For example, a company could do so by hiring a job seeker. When an existing staff member must pledge not to compete against his or her employer, it's necessary to provide extra compensation. A supervisor might accomplish this by giving the person a raise or supplying additional benefits. This rule prevents unscrupulous business owners from deceiving people into signing noncompete contracts without hiring or otherwise rewarding them.

Jurisdiction

The federal government hasn't enacted any laws that specifically pertain to restrictive covenants. Employers must rely on state authorities to enforce these agreements. The limitations vary from one state to the next. Florida courts usually uphold non-compete contracts. On the other hand, judges in North Dakota and Montana seldom enforce them. New York treats employers more favorably than California or Oklahoma. However, it normally only upholds restrictive covenants if staff members clearly possess confidential data.

To sum up, non-compete agreements aid businesses that can't afford to lose valuable trade secrets or loyal customers. Courts enforce these covenants if they exist for legitimate reasons and impose justifiable restrictions. A company must also reward the signer in some way. Many employers find it difficult to create contracts that provide adequate protection while complying with state law. Fortunately, employment lawyers can help businesses develop suitable agreements for specific jobs and industries.

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