A non-compete agreement is a contract between an employee and employer. A non-compete prohibits an employee from engaging in a business that competes with his/her current employer’s business. While an employer cannot require you to sign a non-compete, they may terminate, or choose not to hire you, if you refuse to sign. Courts generally do not approve of non-compete agreements. In disputes over non-compete agreements, courts consider certain factors to decide if the agreement is reasonable. If you find yourself negotiating a non-compete agreement, consider limiting the agreement to only what is necessary to protect the employer and asking for a severance payment if you are terminated. Learn more about how a non-compete agreement might affect you below.
Non-compete agreements, also known as covenants not to compete or restrictive covenants, are quite common in employment agreements, employment applications, and in contracts for the sale of businesses. The general purpose of these agreements is to restrict the ability of employees who sign the agreement to go into business against the employer within a certain geographic area for a certain period of time. If you sign it, typically you are agreeing that you will not compete with your employer by engaging in any business of a similar nature, as an employee, independent contractor, owner, part owner, significant investor, and whatever other forms of competition your employer identifies to cover its bases.
No. However, not agreeing to a non-compete agreement may cost you your potential job. If your current employer fires you or creates a hostile work environment if you refused to sign a non-compete, your state’s employment law may give you a remedy.
Whether it is legal for your employer to deny you a job or fire you will depend on the facts of each individual case and each state’s law.
While non-compete agreements are analyzed under state law, and each state is different, there are some common factors that courts look at to determine whether a non-compete agreement is reasonable:
- Does the employer have some legitimate interest it is protecting with the non-compete agreement?
- What is the geographic scope of the restriction? Will it keep you from making a living?
- How long is the non-compete agreement in force?
- Does the agreement keep you from doing a type of work very different from what you had been doing?
- Did the employer provide you with additional compensation or benefits in return for getting your agreement to sign the non-compete?
If you need to consult an attorney, visit Workplace Fairness’ Attorney Directory for a listing on employment attorneys.
It is not enough that your employer simply doesn’t want you to take your skills and abilities to a competitor. There needs to be some good reason for the non-compete. For example, if the employer introduced you to all its best customers, it may have a legitimate interest in keeping you from going to a competitor and luring those customers away. The goodwill developed in terms of customer relations gives the employer a competitive advantage. They may want to prevent you from capitalizing on it, thus they are entitled to protection.
It depends on the facts of each case and state law. Courts typically look at the specified region(s) contained in the non-compete agreement to determine whether it is reasonable. Generally, courts find that an agreement is reasonable if the geographical restriction coincides with the area where the employee previously worked.
Generally, non-compete agreements that are from six months and two years are considered reasonable, depending on the facts of each case and state law.
To answer this it is important to define the employer’s protectable interest. This is analyzed by courts using tests which vary from state to state. In general, courts look to the following factors when assessing protectable interest:
- The nature of the work performed,
- The length of time the employee was employed by the employer,
- Whether the employer conferred special training or education as a benefit of employment,
- Whether the employer shared trade secrets with the employee which could substantially affect the employer if used by a competitor,
- Whether the information the employee possesses is really kept confidential by the employer, and
- Whether the knowledge the employee has is unique to the employer, or of a general nature, such as general sales experience.
The employer seeking a non-compete agreement may, in some cases, pay what is called “consideration” in contract law; in this instance, an employer would provide additional compensation (or other non-monetary benefits of value) in exchange for the employee agreeing to this provision. Whether “consideration” is required is governed by state law. Generally, your employer does not have to give you additional financial compensation, but not doing so may have consequences when the employer tries to enforce the agreement. Some states require the payment of consideration, while others merely consider it as an important factor for courts to consider when determining whether to enforce the agreement.
Yes. However, whether it is legal for the employer to take adverse action against you – such as firing you or writing you up — for refusing to sign will depend on the circumstances of your case and state law.
It depends. The approach of courts to non-compete agreement clauses varies depending on the facts of each state and state law. Some states are very eager to enforce non-compete agreements and will actively rewrite those which are too broad in geography or time to make them more readily enforceable. Other state courts have taken a very negative view of non-compete agreements and have enforced only those that are reasonable in geography and in time, and those that are supported by substantial consideration (the payment of money in return for the agreement).
It depends. First look at the terms of the non-compete itself. If the non-compete says that it applies if you are terminated, then look at whether the non-compete is legal. For example, if the reason for your termination is employer misconduct (e.g., discrimination), you may have a cause of action under the law that addresses the employer misconduct.
Probably not. Most courts have held that an employer who is engaged in illegal activity which results in an employee quitting cannot enforce a non-compete agreement against the employee who left for that reason.
Courts are very reluctant to enforce a non-compete that is so broad it keeps an employee from working at all. Also, there are courts which have relied on state constitutions to limit the ability of employers to restrict an employee from working at all.
It depends. There may be claims you can make against the new employer for not telling you up front that this was a requirement. These claims will vary from state to state and may depend on the enforceability of the non-compete.
Legally no, but it may give you a hint that the employer does not see the cost and risk of trying to enforce the agreement as worth it. It may also be that the employer has decided the agreement is probably not enforceable anyway. That is no guarantee the employer will not try and enforce it in your case, unfortunately. Before you deliberately choose to violate a non-compete agreement to which you are subject, consult a lawyer who can go over the agreement with you and help you assess an appropriate course of action.
Probably not. Most courts require that you affirmatively agree to the terms of a non-compete – such as by reading and signing it. It is usually not enough for that the employer to just tell you it is there for you to be bound by its terms.
If you choose to leave an employer with whom you have a covenant not to compete, the employer may do nothing. In this case be sure to come to some kind of agreement with the employer so you can do what you want. In addition, be sure to get the employer to release you from your non-compete agreement with a signed document.
On the other hand, the employer may sue you and go to court seeking what is called an “injunction” or restraining order to prevent you from violating your agreement. Because a violation of a non-compete agreement can cause an employer immediate harm, the court will often use expedited procedures in these cases. Once your employer requests an injunction or restraining order it may only be a matter of days or weeks before you have a hearing scheduled before a judge. You may have very little time to retain an attorney and discuss your case with that person, so make sure that you enlist the help of an experienced employment lawyer as soon as you know that your employer is challenging your actions.
At the first hearing the court may make a temporary decision to stop you from doing to challenged activity or decide that what you are doing is okay for the time being. A temporary order will only be effective until the court decides the matter.
If an injunction is granted by the court, this is a legal remedy which can stop you as an employee from working for the period of time the court sets. The injunction is lifted when the case is resolved.
Whether you have to pay money depends on the facts of your case and state law. You may have a provision in your non-compete agreement that outlines the amount of damages should you breach the agreement. Even when there isn’t a damages clause in the non-compete agreement, you employer may seek damages for losses they incurred (e.g., lost profits from customers you took away or the loss of confidential employer information and similar losses).
Sometimes. Employees have been successful in bringing legal claims for what is called “tortious interference with business relationships.” This legal claim applies to cases where an employer has cost the employee a job because they have attempted to enforce a non-compete agreement which is not actually legally enforceable. Sometimes these “tortious interference” claims can result in substantial damages being awarded to the employee for the employer’s overreaching efforts to stop the employee from finding other work.
In addition, there is a strong argument that an employee who is terminated for refusing to sign an unreasonable covenant not to compete could have a claim against the employer for discharge in violation of this public policy of the state. Results from such “public policy” claims vary from state to state.
In most states the answer is yes. Most states provide a mechanism for testing the enforceability of a contract. This mechanism is called declaratory judgment. Depending on the availability of this remedy in your state and the tactics involved in each individual situation, it may make sense for the employee to bring a declaratory judgment action asking the court to determine whether the agreement is enforceable. There are many practical and tactical considerations involved in deciding whether or not you as an employee should initiate a declaratory judgment action challenging a covenant not to compete. No one-size-fits-all answer applies to this issue.
In the sale of a business, it is typical for a purchaser to include in a contract for sale the requirement that the seller does not engage in the same type of business within a certain geographic area for a certain period of time. Whether these types of non-compete agreements are enforceable or not and the degree to which courts will enforce them varies greatly from state to state.
If your employer is asking you to sign a non-compete agreement, try to limit the geographic scope, duration, and industry in which it is applicable as much as possible. The goal is to limit the agreement to what is necessary to protect the employer. You should also consider asking for severance pay in the event of an involuntary termination. You should also consider having an attorney review the agreement. See Workplace Fairness’ Attorney Directory for a listing on employment lawyers.