By: Maureen Abbey Scorese
Introduction
Non-compete agreements continue to flourish despite the efforts by some government authorities to eradicate them. The non-compete agreements serve a limited and essential purpose to protect a company’s sensitive and confidential business information from misuse by former employees – whether knowingly or unknowingly – when those employees are offered employment by a company’s competitors. Non-compete agreements serve to prevent the misuse of a company’s confidential business information by a former employee or a competitor, to the detriment of the company. To be enforceable, a non-compete agreement must be reasonable and not overly broad. It must not create an undue burden or hardship on the employee or unreasonably prevent him from obtaining employment if he were to leave the employer.
Non-compete clauses are typically a part of the employment agreement and written by the employer. Therefore, it is essential for both parties to make sure they review the document thoroughly.
A poorly drafted non-compete agreement could lead to challenges such as undue restrictions on future employment, reduced earning potential, legal and financial consequences, and a damaged professional reputation. Additionally, state laws vary, so it is vital to consult with the rules outlined in your state of residence before signing. Some states have outright restrictions against non-compete agreements. Other states have limitations on their application and enforceability.
Step 1: Key Terms
Employees:
- Understanding the agreement is vital for the employee to avoid future consequences.
- While reviewing it, it is essential to pay close attention to sections such as:
- Duration post-employment of the restrictive period,
- Geographic scope, which defines the specific areas the employee is restricted from working in,
- Legitimate business interests,
- Actual client contacts,
- And restricted activities, such as what kind of jobs, companies, or clients the employee will be prohibited from communicating with or being employed by for the duration of the restrictive period.
Employers:
- Clearly specify the reasonable duration after the employee leaves that the non-compete applies for (the “restrictive period”). In most circumstances, it is acceptable to have the non-compete remain valid for 6-24 months after the employment period ends.
- Narrow down the geographic scope to where the business would be directly affected to ensure reasonability.
- Define what type of work, competitors or clients/customers that are restricted to protect the company’s legitimate business interests.
- Indicate what the company is trying to protect with the non-compete. For example, many businesses use non-compete agreements to protect trade secrets, customer relationships, and proprietary information.
Step 2: Ambiguities
Employees:
- Assumptions are dangerous! Employees should ask questions and clarify vague language with their company, so both parties are on the same page.
- A “competitor” is best defined by the company, and the definition should be clear as this is a key component of the non-compete agreement.
Employers:
- If the employee asks for clarification, employers should comply and review any doubts in the agreement.
- Business operations, interests, competitors, and clients/customers will change over time. The language should be broad enough to adapt to these changes, but not so broad as to be unclear.
- Amendments to the language of any non-compete agreements should be considered as businesses develop, changes occur in scope of competitors, clients and customers.
Step 3: Consider Future Impacts
Employees:
- Think about how the agreement will affect any potential future work opportunities, salary, and lifestyle.
- If the employee believes the agreement severely affects any of the above, the non-compete might be too broad or unreasonable.
Employers:
- Employers must ensure they have a process for addressing potential breaches and enforcing the non-compete agreement.
- Employers are expected to review and update the non-compete agreement if changes occur in business or law practices.
Step 4: Negotiation
Employees:
- Employees can ask for changes to the agreement.
- If necessary, negotiate aspects such as duration and geographic scope.
Employers:
- Good practice for employers is to ensure they are maintaining important aspects of the agreement during negotiation, and keep in mind the actual legitimate business interests of the company.
- Remain transparent about terms and purpose of the terms, so as to build trust with employees and transparency.
In negotiation, it is best for both employees and employers to consult with an attorney for guidance. This may not be necessary in all cases and would be most appropriate for higher level employees.
Step 5: (State Specific) Fair Consideration
Fair consideration is necessary for the non-compete agreement to be enforceable. Consideration can be the employees’ salary (continued salary), a bonus, job opportunity or promotion in exchange for the employee signing the agreement.
Step 6: Plan Your Exit Carefully
Employees:
- Employees who are planning on leaving their employer should review the agreement before exiting the company. Generally, it is recommended employees avoid accepting a job offer from direct competitors of the employer during the restrictive period.
- Employees may need to disclose at their exit interview where they intend to work or certify that they will adhere to the restrictive covenant that they previously signed.
- Employees should be prepared for potential legal action or demands from the employer if they do not adhere to the non-compete agreement.
Employers:
- Review the enforceability of the agreement and ensure it complies with state and federal laws.
- Examine the duties of the employees in their new role and see if the new employment would violate any aspect of the non-compete.
- During exit interviews, employees review the non-compete agreement, ensure clarity on competitors, and prohibit work with clients/customers and the use of the company’s confidential business information. It is in this exit interview that an acknowledgement and updated list of competitors, clients (with whom the employee had interaction or specific information), should be reviewed and signed by the employee.
Step 7: Seek Legal Advice
Employees:
- It is imperative that employees contact a lawyer to review their agreement and talk over any concerns with the non-compete agreement.
- Legal advice is advantageous for the employee, both before signing the non-compete agreement and before leaving their job.
Employers:
- Consult with an attorney before, during, and after the execution of the non-compete.
- When drafting the agreement, it is recommended to have a lawyer review it to highlight any potential issues that could arise.
- While the company is headquartered in one state, employment of individuals in other states may weaken the terms of the agreement. This will depend on circumstances and should be reviewed with an attorney.
Conclusion
Understanding the complexities of non-compete agreements can be difficult to navigate. Employment laws and enforceability of non-compete agreements continue to change. For specific questions, help draft or review a non-compete agreement, or legal advice before starting a new position, contact the trusted Chugh, LLP legal team.
