What You Should Consider When Executing a Non-Compete
January 30, 2017
Key Considerations When Executing a Non-Compete
Non-competition agreements prohibit former employees from working for a competing business for a specific period of time. The goal is to protect confidential company information and valuable clients from also walking out the door when an employee leaves the company.While once confined to the tech industry, employers in a range of industries are now turning to non-competes. As highlighted by the New York Times:
“Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals.”
The Basic Provisions of a Non-Compete
A non-compete is essentially a contract in which an employee promises not to take a job with a competitor for a certain period of time after the employment relationship ends. Because they restrict the rights of individuals to pursue employment, courts closely scrutinize non-competition agreements. Some states, like California, largely prohibit them altogether. Below are a few considerations to help ensure your agreement passes muster:
- Protect a Legitimate Business Interest: You can’t prevent your employees from working for a competitor simply out of spite. Rather, the non-compete must protect your company’s business interests. Examples include goodwill, proprietary information, and personal contact with clients.
- Narrow the Restrictions: Non-competition agreements must be reasonable with regard to time, activities and geographic scope. For example, some courts have found that non-competes that last longer than one year are too restrictive. Courts will also generally not enforce an agreement that extends to areas where your business does not currently operate. The bottom line is don’t make the terms any more restrictive than necessary to protect your start-up.
Know the Non-Compete Law of Your State
State laws regarding the enforcement of non-competition agreements vary widely. Therefore, it is imperative to tailor your agreement to the specific requirements of the jurisdiction. In New York, non-competes must be reasonable such that the restraint “is no greater than is required for the protection of the legitimate interest,” which are limited to the “misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary.”
Under current New Jersey employment law, enforceable agreements must strike a balance between protecting the employer’s legitimate business interests with the employee’s right to work in a field for which he or she is trained. In general, courts balance these considerations by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed. While legislation has been proposed in New Jersey to restrict the use of non-competes in certain circumstances, it has failed to pass.
The Potential Disadvantages of a Non-Compete
While non-competes provide significant legal protection, they also have their downsides. Critics argue that they stifle innovation and job creation by keeping workers locked in their jobs. One of the biggest complaints is that they prevent workers from starting their own companies, which is something entrepreneurs can appreciate.
Last year, the Obama Administration issued a report regarding the potential misuse of non-competition agreements. The report, entitled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” found that nearly one-fifth of U.S. workers (30 million) are subject to non-competes. It concluded that “in certain cases, non-competes can reduce the welfare of workers and hamper the efficiency of the economy as a whole by depressing wages, limiting mobility, and inhibiting innovation.”
For startups that do not want to go the non-compete route, there are also other options to protect valuable intellectual property. For instance, startups can require employees to sign non-disclosure agreements to protect trade secrets, such as marketing strategies, inventions, software code, and client lists.