If you’re a business owner with employees, chances are you’ve at least contemplated the idea of having them sign a “non-compete.” Today, employee agreements not to compete with the employer are the rule, not the exception. According to reports from the U.S. Department of the Treasury, about 19% of American workers—about 30 million people—are currently bound some form of a non-compete agreement.
While non-compete agreements have become commonplace, many courts across the nation have placed these agreements under fire, finding them to be unfair to the employee when they impose overly harsh restrictions on competition and innovation. Some states (not Florida) have gone so far as to hold non-compete agreements to be unenforceable. Other states have held that they can only be enforced if they satisfy certain stringent requirements.
In light of this increased scrutiny by the courts, we’ve taken the liberty to outline exactly what non-compete agreements are designed to do and what conditions must exist to ensure they’re legally valid and enforceable. Equipped with this information, we hope that you’ll be better able to decide whether or not to require your employees to sign non-compete agreements.
A non-compete agreement is a legally binding contract between an employer and an employee that seeks to restrict the employee’s ability to compete with the employer once the employment relationship has ended. The restrictions typically cover a set period of time and a specific geographic region.
Non-compete agreements are designed to prevent an employee from leaving your company and taking a new position with a similar company in your industry—or starting his or her own company—and using your proprietary company information to compete with you.
Because there is no federal law governing non-competes, the rules covering how these agreements work is left up to the states. And the manner in which they are enforced varies widely depending on the state.
For example, California considers employee non-competes totally unenforceable and will only consider enforcement if it involves the sale of a business. Beyond California, roughly one-third of all states impose some level of restriction on the enforceability of non-competes. Certain states, including Florida, are “blue pencil” states, meaning that their courts will uphold a noncompete agreement and simply pencil out any unenforceable provisions and rewrite them to, so they are enforceable.
Since enforcement of non-competes varies so much between states, it’s important that an agreement be tailored specifically to meet your state’s requirements. If you do business in more than one state, be sure that you have different agreements for employees in different states that reflect the unique laws of each to ensure every one of your non-compete agreements with every employee is enforceable.
In order to be legally valid, the terms of a non-compete agreement should seek to protect your company’s legitimate business interests without harming the employee’s ability to make a living once their employment has terminated.
When challenged, the courts typically scrutinize three elements of a non-compete. To be considered legally valid, a non-compete must:
Protecting legitimate business interests: When creating a non-compete, give due consideration to what business interest you’re trying to protect with the agreement. Most companies use non-competes to prevent an employee from sharing confidential company information or trade secrets with a competitor.
Yet for the information to be deemed a trade secret, courts look at whether or not that information was clearly identified as confidential and what steps the company took to protect it. What’s more, you should ensure that an employee actually has access to confidential information before requiring them to sign a non-compete.
Generally speaking, non-competes should generally target high-level employees with ready access to sensitive company information, rather than using them as a blanket policy for all employees.
Supported by consideration: Another important element of a non-competes is whether or not there is some form of consideration or payment made in exchange for the employee signing the agreement. If the agreement is signed when the employee is hired, courts typically view employment as the consideration.
But if an employee is asked to sign the non-compete after working for the company for some time, courts will often invalidate the agreement if the employee was not offered some payment (raise) or other benefit (promotion) in exchange for signing.
Reasonable scope, geography, and time: In order to be upheld in court, a non-compete agreement that has restrictions on where and for how long an employee is forbidden from competing with your company must be reasonable. For example, the agreement cannot bar an employee from working indefinitely or within the entire U.S., since this would place unreasonable hardship on the employee’s ability to make a living.
What’s considered “reasonable” depends greatly on the type of business, industry, and location. For example, business owners have the right to restrict competition in the immediate area where they operate, but they cannot forbid an ex-employee from operating a similar business in a distant region, where the former employer doesn’t do business.
Similarly, the duration of the non-compete agreement cannot be so long that it would seriously affect the ex-employee from being able to support themselves. Given this, the duration of most non-compete agreements is less than two years, and some last only a few months.
Because striking a balance between protecting your company’s business interests and not unfairly restricting an employee from earning a living can be quite challenging, if you’re ready to implement them within your business, give the experienced legal team at Thrive Law a call. We can help you draft an air-tight agreement that works for your company and industry.
As your local business and employment law boutique, we understand the nuances of Florida contract law, so we’ll know the specific requirements that must be met in your particular area of operations. Moreover, we’re experienced in drafting non-compete agreements that will keep you out of court by offering maximum protection for your business without imposing unreasonable restrictions on your team.
This article is an educational service of Thrive LawTM, a business law boutique. It does not constitute legal advice or imply an attorney client relationship. We offer a full spectrum of legal services for businesses and are equipped to help you make the wisest choices about your business dealings while you’re alive and well or in preparation for the event of your incapacity or death. We also offer a Healthy Business & Creative Checkup for ongoing ventures, as well as outsourced general counsel plans for businesses who need a legal team on speed dial. Contact us today to schedule: 727.300.1990 or email@example.com. We cannot wait to meet you!