From small start-ups, to large corporations, to non-profits: the significant increase in the inclusion of non-competition clauses in employment agreements is staggering. A concept often associated with high level executives, the clause has become prolific throughout the corporate ladder.
The goal is to avoid unfair competition.
A non-compete clause, sometimes referred to as a covenant not to compete, is a common provision in employment contracts. Parties (usually an employer and employee) can contractually agree to restrict an employee’s business actions for a certain amount of time after resignation or termination. For business owners, a non-compete can be crucial. The last thing they want to see is a worker take valuable, confidential information, contacts, customer lists, marketing plans and the like and use it as a competitive advantage, working for a rival or starting their own competing business.
Gotta make that bread
For employees, non-competes can mean economic hardships and stifling entrepreneurship. Finding a job can already be a daunting task. Restricting someone even further from finding work can be unduly harsh. It’s against public policy to prevent people from earning a livelihood. Non-competes also make it difficult for employees to jump ship and start their own businesses…. putting a damper on the American Dream.
Balancing Act
Whether you’re a business owner or an employee, there are some key considerations when it comes to covenants not to compete:
1. Location, location, location. Different states treat non-competes differently. California invalidates almost all non-competes, apart from a few exceptions. Florida is very pro-enforcement. New York is somewhere in the middle, enforcing non-competes on a case by case basis using a reasonableness test.
2. Proper Papering. Restrictive covenants are part of contracts and therefore, basic contract law principles apply. For a contract to be enforceable, there must be “consideration” or a bargained for exchange. Non-competes are usually in employment agreements presented in anticipation of employment. The new job itself serves as consideration. If the contract is presented at a later time by the current employer, there must be additional consideration: a bonus, higher salary, promotion, more vacation days or other benefits.
3. Prudent Purpose. In New York, covenants not to compete must be reasonable. They cannot impose an undue hardship on the employee or be injurious to the public.
4. 3 Prong Test. In New York, the non-compete must be reasonable in:
a. Duration – Six months or less is often deemed to be reasonable. However, it really depends on the situation and industry. Longer periods have been held valid in different circumstances.
b. Scope – A non-compete should be no greater than required to protect an employer’s legitimate protectable interests. It can’t be overly broad. For example, a sales rep for a vodka company may be restricted from selling other brands of vodka, but not from selling all beverages or all liquor.
c. Geography – the restriction must be reasonable in geography and, again, it depends on the particular facts and line of work. Fifty miles could be excessive for a hair salon. Nationwide could be reasonable for a far-reaching website. Metropolitan cities like NY, LA and London could make sense for other businesses.
5. No Hypocrites allowed. Even when an agreement has a reasonable non-compete clause, there are certain cases when the provision is still unenforceable. For example, if the employer breached the contract, failed to perform material duties or pay the employee, the agreement may be unenforceable. Often, employment contracts are drafted so that the restrictive covenant doesn’t apply if the employee is terminated without cause (no fault of the employee).
6. Nanny Court. New York courts may narrow and limit an overly broad non-compete to render it enforceable. However, they are not obligated to do so. Sometimes a non-compete is just plain unenforceable.
The stakes can be high and litigation of non-compete agreements is climbing. Think hard before you hire your next employee or take your next job. It could be your business’s future or your personal career on the line.
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