Non-compete clauses are a well-known topic of interest in employment law, with an increasing number of businesses trying to protect their interests.
How enforceable are these strict “no competition” rules for employers and employees, and what do you need to know when it comes to using or abiding by these clauses?
What is a non-compete clause?
A non-compete clause is part of an employment contract originally intended to protect confidential company information (such as intellectual property, client lists, or financial data) from leaking to competitors through employees.
It generally means that former employees cannot work for their company’s competition for a predetermined time after they have worked for their current employer.
In an employer’s eyes, non-competition clauses mitigate the risk of entrusting employees with private material. Consulting and contractor agreements also frequently use these clauses because of the high risk of temporarily hiring someone to complete a project.
Executives, partners, or officials used to be the only ones to use non-compete clauses. These are jobs where the employee is privy to important information that, if compromised, could lead to lost clients or stolen ideas.
These days, non-compete clauses are showing up in almost every industry. This may be because there is more to protect, or that the means of relaying this information has become easier. It could also be because people are valuable commodities, and losing talented minds to the competition is a great hit. Not only are they an asset, but they may take what they know about one company and use it at another.
Are non-competes enforceable?
It depends on the circumstance. Each situation is slightly different. Judges will look at several factors when deciding on a ruling for these types of cases, including:
- Local or regional restrictions: Generally, outlandish geographical restrictions (like state-wide regulations) aren’t enforceable because it is unreasonable to the employee. A local area restriction may pass, so long as it is necessary to protect the employer.
- Time restrictions: While there is no limit on the time period an employer can specify, the longer it is, the more likely it won’t be fair to the employee.
- Type of industry, work or specific company: Businesses who have direct competitors may indicate the company they wish former employees to avoid. However, an employer can’t put restrictions on the field of employment in general.
- Circumstance: Sometimes non-competes are contingent on whether the company terminated the employee or if they left the company voluntarily.
- Economy: If the non-compete clause interferes with the local economy, such as putting another company out of business or restricting the competition, it may not be enforceable.
- The employee’s ability to find work: An employee should be able to find a job after leaving their current one. If the court finds the non-compete too restricting, it won’t hold up.
- Too broad or unnecessary: If the employer has created unnecessary restrictions on its employees, the court will not uphold the non-competition clauses. For instance, if they forbid the employee from finding work with a competitor in the entire state for four years.
- Type of work being done/job position: If an employee doesn’t have access to confidential information or trade secrets, courts may deem the non-competition clause unnecessary as they can’t leak sensitive material.
Drafting a non-compete agreement
Non-compete clauses are not allowed in certain states, such as California, except in very strict circumstances. Always check with your state employment laws before using non-compete clauses or signing a document with one.
Using a non-compete is a way to protect your company’s confidential information, but you should only use one where it is warranted and make sure the terms are reasonable. Think about whether a judge would consider your terms fair to protect your company.
Signing a non-compete agreement
If an employer asks you to sign an employment contract with a non-compete clause, make sure you read the fine print and ask yourself if the non-compete clause is relevant to your job, fair, and reasonable to you as an employee.
With the world heading digital, non-competes are a hot topic. As competition heats up and employees change jobs more frequently, there is a stronger need to keep secrets locked down and valuable employees at your company. Using a non-compete clause properly can protect your company.