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Non-Compete Agreements: What Can They Accomplish?
Non-competes are based on fear — fear that an employee might run off to a competitor and take along some highly specialized knowledge. And while that concern is legitimate, non-compete agreements must be phrased carefully and they cannot unreasonably restrict a former employee’s activities. It may seem ironic that companies encourage innovation and brilliance while employees are on the payroll, but pull the plug on that ambition if they dare to leave. But non-compete agreements attempt to do just that to control damage.
|State Laws VaryLaws regarding non-compete covenants vary from state to state. For example, courts in California reject non-compete agreements because state law makes them unenforceable except in limited circumstances. Because non-compete covenants are generally not allowed in California, employers there often use confidentiality agreements and other types of contracts to protect trade secrets and other information.
A few examples illustrate how courts have looked at agreements:
Whether signed when staff members come on board, or as part of a ream of paper presented as they leave, non-compete agreements have similar restrictions. An employer lays claim to any products, intellectual property and ideas developed while on the job. And customers or clients handled while a staff member was employed by the company are also generally off-limits.
Courts have tried to balance the interests of employers and departing employees in deciding whether or not a non-compete agreement should be upheld. In order to hold up, here are three areas in which the agreement must be reasonable:
- You obviously can’t restrict a former employee from competing forever. The time period considered reasonable is one to three years. Sometimes this period is shortened, depending on the industry. For instance, in high-tech businesses where information changes quickly, the restrictions are frequently shorter.
- You can make restrictions in the area where your company does business, but probably not nationwide or worldwide. One exception is Internet or software companies that operate worldwide.
- No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills acquired over years. Agreements are analyzed for reasonableness by the courts.
Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can’t be restricted from taking a sales job at another manufacturer’s showroom.
Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them. Others stipulate that employees must enter into the agreements when first hired. If the document is sprung on an employee later — up to and including quitting day — the company may have to offer something extra (such as a promotion, raise, stock options or other enticement) for the agreement to be valid.
So the best time to secure an agreement is generally when you hire an employee.
To sum up, you can prevent staff members from competing with you after they leave your company but the exact restrictions depend on many things — most importantly, whether circumstances make it reasonable and enforceable.
Bringing the Human Back to Human Resources
Our team of HR experts can help answer your questions regarding non-compete issues and constructing a productive agreement. Feel free to reach out to our team to discuss your questions.