Employers are using non-compete agreements with their employees in greater numbers than they used to. These agreements prevent present and former employees from working with competitors. They also limit the chance that private employer information or trade secrets are given to another company.
As long as non-compete clauses in employment contracts meet acceptable standards, courts will generally uphold them. Employees may face legal penalties if they violate a non-compete clause. These penalties include money damages or an injunction that prevents further violations.
Along with the violating employee, the company that hires her may also face penalties. Any company that helps an employee violate a non-compete clause may have to pay damages. Courts don’t want companies to prosper from breaches of contracts. Many countries don’t favor non-compete clauses. They impose restrictions on when they can be used.
There are several reasons why countries may not favor non-compete clauses. Employment contracts are entered into at the start of the relationship between the employee and the employer. Employers have most of the power. Employees have very little leverage to negotiate or bargain for a contract without a non-compete clause.
It’s also difficult for an employee to think about future employment when she starts a new job. She’s usually concentrating on making a good start with her current employer. Non-compete clauses make it difficult for employees to gain future employment or become self-employed.
The Principles of Non-Compete Agreements
Countries differ in how their laws are written to deal with non-compete clauses. However, there are certain key principles that are very similar across the world. Examples of some of these principles include:
- Reasonableness Rule: A non-compete clause in a contact must be reasonable in order for it to be considered valid. Courts balance an employer’s interest in its information and resources with the right of an employee to work someplace else. Any contract with a non-compete clause will be examined closely by a court to make sure that it’s narrowly tailored to protect the employer’s business interests. If the clause unduly restricts the employee from other opportunities, it’ll usually be struck down.
- Independent Consideration: Some states require the employee to receive independent consideration before it’ll recognize a non-compete clause. This means that the employee received something from the employer for agreeing to the clause. The most common example is an employee agreeing to the clause in exchange for employment. The contract is entered into at the start of the work relationship. If an employer wants the employee to sign a non-compete contract after the relationship began, in these states it would have to offer some other benefit, such as a promotion or raise.
- Duration: Courts usually require that non-compete contracts don’t last too long. The time period must be limited. Courts will examine all the circumstances when determining if a non-compete clause has too long of a time frame. Usually a time period of one to two years will be considered valid. Anything over that may be struck down by the court. Courts are normally more lenient if the buyer of a business is attempting to prevent the old owner from competing. They allow equal parties to negotiate the time frame.
- Distance: Courts will also check to see if the geographic limits of the contract are reasonable. Non-compete clauses shouldn’t restrict employees from working in other geographic areas that won’t affect the former employer. If the clause is too broad in distance, courts may limit the clause to only a small area or strike down the whole thing.
- Blue Pencil Rule: The blue pencil rule means that the court has the authority to modify a non-competitive contract if it’s too limiting. It can then enforce the modified contract. However, some states prohibit this rule. Courts in these states must hold that a non-competitive contract is either valid or invalid.
- Liability for New Employers: New employers that hire employees with non-competitive contracts can be sued for damages . Employees should always inform potential employers about any non-competitive agreements so that they’re not surprised later.
Employers should always be assisted by attorneys when drafting any non-compete contracts. They’ll be able to help employers tailor the contracts to help protect business interests without them being too restrictive. A non-compete contract that’s invalid is the same as having none at all.
Questions for Your Attorney
- Does an employer have the ability to force all of its employees to sign a non-compete agreement that lasts for life? What about 20 years?
- Even if an employee signs a non-compete agreement, can he still compete against the employer if he thought he was wrongfully fired?
- If I sign a non-compete contract, can I still work for a competitor if the new job is different than my old job?