By: Dilawar Fazal and Simran Ahuja
Preventing employees from working for a competitor is a big challenge for companies. Not only is it tough to lose innovative talent, such moves can put corporate secrets at risk. For this reason, employers often use non-compete clauses as a way of protecting their confidential information. However, non-compete clauses must meet strict requirements in the state of New York to be legally enforceable.
What is a Non-Compete Agreement?
A non-compete agreement is a contract or a clause between an employer and employee that prevents the employee from working for a competing business or a client, during and after the period of their employment. These covenants are generally incorporated into the employment contract itself, and entered into before the start of employment.
Each state has its own set of rules for enforcing non-compete clauses and agreements. For a non-compete to be enforceable in New York, it must be reasonable and it must overcome the presumption of unenforceability.
What Makes a Non-Compete Agreement Reasonable?
A non-compete must meet all of the following requirements to be considered reasonable by New York state courts:
- It is required to protect the company’s legitimate business interests.
- It does not create an undue hardship for the employee. If a non-compete makes it difficult for an employee to find work that advances their career or offers a higher salary, than it may be too restrictive.
- It is limited in time period and geographic scope. Typically this means that the agreement does not last longer than required to protect the legitimate interest of the employer.
It is not harmful to the public.
Legitimate Business INterest Test for Non-Competes
New York non-compete agreements must meet at least one of the following conditions to prove that they are protecting a legitimate business interest and are therefore enforceable:
- Employers must be able to prove that the employee had access to their trade secrets or confidential information and could potentially disclose or use them. Agreements can restrict the employee only up to the extent needed to prevent this.
- Employers must also be able to prove that an employee provides truly “unique and extraordinary” services.
Exceptions to the Requirements of Reasonableness
If an employee has the choice between not competing and receiving certain contractual benefits or competing and forfeiting these benefits, the non-compete does not have to be reasonable. This Employee Choice Doctrine is applicable only when the former employee makes the choice, and they are not involuntary terminated. Non-compete agreements are unenforceable in New York if the employee is terminated from employment without a cause.
Unenforceable Non-Compete Clauses: Broad Requirements
Many businesses develop non-compete clauses that are too broad, with common problems including:
- Too long of a duration
- Undefined geographic limits
- Undefined or unlimited job title/field of expertise
An overly broad non-compete agreement would prevent an employee from working in any capacity for a competitor of the employer – not even as a janitor, for example. Non-competes can limit the former employee from joining a competitor in their field of expertise only. New York State uses this “Janitor Rule” to render broad non-competes as unenforceable, and thus void.
Further, undefined geographic limits and overly long durations pose an “undue” hardship on the employee to find a new job after leaving the company.
New York state courts are generally reluctant to enforce non-compete agreements unless they meet strict requirements. However, a well-crafted non-compete agreement will be enforced where the restriction is not greater than is required to protect the legitimate business interests of the employer. For help crafting an effective non-compete agreement, contact an experienced Chugh, LLP attorney.