Non-Compete Agreements
Creating non-compete agreements is an important consideration for businesses wanting to protect the time invested in training employees. Below, we’ve answered common questions about non-compete agreements to help get you started.
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Understanding Non-Compete Agreements:
What is a Non-Compete Agreement?
A non-compete agreement is a contract between an employer and employee in which the employee agrees they won’t provide products, processes, or services that are similar to those provided by the employer. Most non-competes take effect post-employment, but some may be active while an employee is still employed. A non-compete agreement may also be called a non-competition agreement or post-employment restrictive covenant.
Many different rules govern non-competes, and the specifics vary by state. In most cases, non-compete agreements may be written or oral, though in some situations a written agreement is required.
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The Purpose of Non-Compete Agreements
The purpose of non-compete agreements is to ensure employees won’t compete with employers. Competition occurs when people use the skills and knowledge gained while working to leave for a competitor or start a business.
When is a non-compete agreement most useful?
A non-compete agreement is most useful in situations where the work is highly specialized or the industry is highly competitive. Employers invest ample time and resources into their employees in these situations. Losing the value they’ve created can be devastating.
Non-competes are also useful when a business is being sold. If the business seller continues to operate in that industry, the buyer of that business automatically has a competitor who is already familiar with their client base. That can make the value of the business being purchased much less, so the buyer may wish to put a non-compete in place.
When is a non-compete less useful?
A non-compete agreement is less useful in situations where there aren’t special skills or knowledge needed to perform job duties. Generally speaking, minimum wage and/or entry level positions are not those in which a non-compete provides a benefit to the employer. In fact, some states have set minimum compensation requirements before a non-compete would be considered enforceable.
Non-competes used to be viewed more favorably than they are today. They’ve decreased in favor because society—and the laws governing society—has become more employee friendly. The current view sees the employee’s ability to work in their chosen field and geographic area as more important than an employer’s ability to protect the investment they’ve made in the employee. But, non-competes haven’t gone away. Non-compete laws have just gotten more strict and nuanced.
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Learn More About Law on CallRequirements of a Valid Non-Compete Agreement
In states where allowed, a valid non-compete must meet several criteria. Specific requirements vary by state, but most states require non-compete agreements to address duration, geography, and employer interest.
- Temporal Duration
A non-compete agreement will only be valid for a reasonable length of time. Most states don’t allow a non-compete to last longer than 6 months to a year. - Geographic Scope
A non-compete agreement is only valid within a reasonable geographic boundary. This is often written out in miles from the employer’s business. - Further a Legitimate Employer Interest
The non-compete cannot be arbitrary. If it’s purpose doesn’t serve to help a legitimate interest of the employer, it is invalid.
A recent trend in some areas has also limited non-competes only to people earning above specific amounts of money. This is because non-competes can potentially result in extended unemployment or a need to relocate. Public policy does not want individuals and families who have been earning lower wages to have to endure those kinds of economic trials.
When drafting a non-compete agreement, there several other pieces of information that must be disclosed. Different non-competes call for different information, but in general, you must also include:
- Parties
The employer and employee. - Scope
Non-competes must be specific as to the restricted work and/or services. - Competition
Describes the types of businesses and industries the employee is prohibited from working in after leaving. - Damages
What the employer is entitled to if the employee violates the agreement.
How is a non-compete’s reasonableness determined?
Each state has their own case law and statutes that determine what “reasonable” means regarding where a non-compete is valid and for how long. Reasonableness is often determined by the specific facts of a case, though some general state-specific rules may apply.
For example, the Utah Supreme Court has explained that the more local the interest protected by non-compete, the more narrowly drawn the geographic limitation must be (Sys. Concepts, 669 P.2d at 427). In Florida, most non-compete agreements lasting six months or less are presumed to be reasonable, and those lasting two years or more are presumed to be unreasonable. And in Oregon, valid non-competes must comply with monetary constraints that restrict the enforceability of a non-compete only to individuals earning a high wage, which is recalculated annually.
Do non-competes have additional restrictions?
Sometimes. Because each state has differing statutes and case law is often decided on facts related to specific cases, there are often additional requirements in valid non-competes.
In Utah, for example, an employer seeking to enforce a non-compete agreement must pay all employee litigation costs and fees if the agreement is deemed unenforceable. In Oregon, employees must be informed of non-competes, in writing, two-weeks prior to their first day on the job. And in Illinois, a non-compete is void if it imposes “undue hardship” on the employee.
Myriad other restrictions exist in these states and others. Whether you’re an employer or employee, it’s important to know the laws in your jurisdiction.
Should a non-compete agreement be written or oral?
Non-compete agreements can be written or oral in most cases. However, oral agreements can be harder to enforce because it is difficult to prove the terms of an oral contract. Additionally, the enforceability of an oral contract is an uncertain, expensive, and time consuming process. So while oral contracts exist, any contract worth making is worth putting in writing.
What is the Statute of Frauds?
The Statute of Frauds says that some contracts must be in writing. For example, any agreement that cannot be completed within one year of its creation needs to be in writing. So in those few states that allow non-competes to extend beyond one year, the agreement must be in writing.
How can I make sure my non-compete is enforceable?
Simply having non-competes in place does not guarantee they’ll be enforceable. To protect your company, it’s important to make sure non-competes are up-to-date and that they comply with current rules and laws. Here are some things to consider:
- For new employees, revise non-competes to comply with current time limits. In most states, existing employees are also subject to any new non-compete rules, so you’ll want to update existing employee non-competes, too. (Some states do allow provisions that existed at the time the non-compete was signed, so be sure to know the laws in your state.)
- Ensure compliance with geographic and other restrictions.
- Be careful about enforcing potentially non-compliant agreements, for which employees can potentially recover attorney’s fees; seek negotiated post-separation agreement (severance) where possible.
- Review to ensure a reasonable connection to legitimate employer interest is being protected.
- Review the uniqueness of the employee’s position. Ask, is this employee in a position that requires special skills or training, or are they easily replaceable?
- Pay for training and development to keep abreast of new non-compete laws to increase the likelihood of enforceability.
While there are similarities as to some of the requirements of a non-compete throughout the country, each state has their own unique rules and it is best to consult with an attorney in your state as to the enforceability of a non-compete whether you’re an employer or an employee.
Non-Compete Agreement FAQs
How much does it cost to draft a non-compete agreement?
At Law on Call, a non-compete agreement can be drafted for as little as $198. The minimum cost may rise for non-competes that call for special provisions.
How long does it take to get a non-compete agreement in place?
It takes about two hours for Law on Call’s attorneys to draft a simple non-compete agreement.
Can an employer require an employee to sign a non-compete?
Yes. In states where allowed, an employer can make signing a non-compete a requirement for employment.
How can an employee get out of a non-compete?
To get out a non-compete after it’s been signed, employees and former employees will likely need to take legal action against the employer. Then, the non-compete will need to be found to be unenforceable for one reason or another. For example, a non-compete might be void if it’s found to impose undue hardship on the former employee.
Are non-competes enforceable?
Where state law permits non-competes, the agreement must be reasonable in how long it lasts and what geographic scope it covers, and it must be in service of a legitimate employer interest.
What happens if someone violates a non-compete agreement?
It depends. To collect the damages outlined in the non-compete agreement, the former employer will likely be required to sue the former employee. If the employer isn’t prepared or willing to pursue their claim, then the employee may not suffer the consequences. But the potential liability for breaching any contract, including a non-compete, is often not worth the risk.