When you run a business, you want to protect that business. Sometimes, you want to protect it so much that you might have your employees sign non-compete agreements (NCA). A non-compete agreement essentially says that the employee cannot work, or perform certain functions, in a certain geographic area, for a specific period of time, when the employment at your company ends.
Think about that? You are telling someone that they cannot earn a living doing whatever it is that they do. That’s pretty bold. That’s why courts view NCA’s very narrowly, meaning if there is any reason to invalidate the agreement, they won’t hesitate to do so. In fact, some states presume that all non-compete agreements are invalid, including California (with some exceptions, of course).
There may be legitimate reasons for presenting your employee with an NCA. If you hire an employee, train that employee, provide that employee with confidential information, or trade secrets, and give him leads that could not be developed from public sources, then it might be reasonable to ask the employee not to compete. However, you still have to ensure that the agreement is narrowly drafted and complies with the legal requirements of your state.
The laws vary from state to state. Before entering into any NCA, you need to check the laws in your state. For the states that allow NCA’s, there are some general concepts that can help guide you when drafting an NCA. NCA’s are enforceable if they are reasonable in time, geographic location, and scope of business.
When you restrict an employee’s right to work, it cannot be for an indefinite period of time. Some states presume that 6 months is a reasonable time and over 2 years is presumed to be invalid. If you are between 6 months and 2 years, you might have the burden of proving that the length of time is reasonable under the circumstances.
If your employee works, develops leads, and maintains all of his contacts within one city, it may not be reasonable to restrict him from working within the entire state. The geographic restriction must relate to where the employee worked, not where your company conducts its business.
When drafting an effective NCA, you need to focus on what type of work the employee will do for you. You cannot restrict the employee from performing work beyond the scope of his duties for you. If your employee sells software that helps attorneys manage their cases, you may not be able to restrict that employee from going on to a new job selling software that helps accountants manage tax records. You don’t have any business interest in that market, your employee did not perform those functions with you and you will not suffer any damages as a result of the employee’s new job.
A few other things you want to look at:
- Who terminated the employment? If you terminate an employee, a court might not be so open-minded with respect to the restrictions of an NCA.
- Did you pay any compensation for the duration of the NCA? If you pay an employee additional compensation for the NCA period, a court might view that favorably.
- Is the information you deem to be confidential actually available from public sources? Some business owners think that they have confidential information, when in reality that information is available from public sources. If you claim that your employee is using your confidential information to gain business, be sure that it is actually confidential and not available from any other source.
Consider the information above when implementing an NCA, but first check your state laws regarding NCA’s. The laws of your state might be very different from the general concepts listed above.
