A small business that has invested substantial resources in developing a product or a customer base could be devastated if its employees then go to work for a competitor down the street or set up their own competing business. A noncompetition agreement is an important tool that could protect your business from former employees who could otherwise reveal or use your sensitive information, trade secrets, strategies, or customer information for the benefit of a competitor. These agreements are not favored by the courts, however, because they place a restriction on workers’ ability to freely earn a living (and a few states refuse to enforce them at all). If you choose to require a non-compete agreement for employees, it is important to keep the following factors in mind.
1) Your business must have a legitimate, good faith reason for the non-compete agreement. As mentioned above, if your business has trade secrets or other information that is a valuable asset needing protection, a non-compete agreement is more likely to be enforced by a court. On the contrary, if an employee does not have access to valuable or sensitive information, a non-compete agreement is likely to be seen as merely punishment for leaving your business. In those circumstances, it is unlikely to be enforceable. Be careful about which employees you ask to sign non-compete agreements. A receptionist at the front desk is less likely to have confidential business information than a key manager, so a non-compete agreement precluding the receptionist from working for a competitor probably would not be considered a justifiable restriction.
2) The non-compete agreement must be reasonable. Different states have varying standards about what restrictions will be considered “reasonable.” What is seen as reasonable will also vary based on the type of job the employee held, as well as the type of business. You should err on the side of the minimum duration needed to protect your business. A lifetime restriction is almost never enforceable, but a one-year restriction may be deemed reasonable, for example, for an employee who has had access to your customer information. The non-compete agreement also should only cover the geographic region in which your business operates. A restriction covering the entire state will be considered unreasonable if your business only provides services or goods in one county. In addition, the non-compete agreement must not restrict an employee from performing a completely different job for a competitor. If your salesperson takes a job as an interior designer for a competitor, he or she is less likely to use “insider” information gained while employed by your company against you in the new position because the duties performed will be quite different.
3) Provide a benefit to the employee to compensate for the restriction. If you require a new employee to sign a non-compete agreement as a condition for hiring that employee, the employee is receiving the benefit of a job with your business. However, if you require someone who is already employed by your company to sign a non-compete agreement, it is important to provide an additional benefit, such as a raise, to increase the likelihood that the agreement will be enforceable.
4) Weigh the pros and cons. Although non-compete agreements do protect your business’s trade secrets, sensitive information, customers and more from being disclosed to a competing business, they may also discourage some potential employees from accepting a job with you or prompt existing employees to leave rather than sign the agreement. Along with the concerns about their enforceability, this is another reason to impose only the minimum restrictions needed to protect your business.
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A non-competition agreement should be customized and carefully drafted to meet the needs of your particular business. We can help you determine which restrictions are legitimate and reasonable to decrease its vulnerability to a legal challenge. Give us a call to set up a meeting to discuss this and any other employment-related concerns.