Generally, by signing a covenant not to compete, an employee agrees that if she leaves the employer, she will not go to work for the employer's direct competitors. The employee may or may not receive compensation for signing the agreement.
Covenants not to compete are also known as "non-compete clauses." For some businesses and companies that have a unique trade, a non-compete agreement may be necessary for the protection of the company’s business plans, trade secrets, and confidential information. It is also a way of ensuring that they won’t lose their employees to similar businesses.
Businesses that typically use covenants not to compete include those dealing with:
- Highly confidential materials
- Client demographic/information databases which an employee can access
- Businesses with a direct competitor
- Trade secrets
- Trademarks and copyrights
Typical Restrictions in a Covenant not to Compete agreement may relate to:
- Time - After the employee leaves the former employer, the employee must refrain from working for a competitor for a certain period of time
- Type of business - Working in certain industries and businesses, related to that of the employer, may be prohibited
- Location - The employee may not be able to work for a competitor within a specified geographic location
When Are Non-Compete Agreements Used?
Non-compete agreements frequently come up in the following contexts:
- Employment: An employer can prevent employees from offering their services to competing businesses.
- Sale of Business: A new owner of a recently purchase business may want to prevent the previous owner from engaging in the same business.
- Various Business Associations: When one of the business partners leaves a professional partnership to open his own practice, his partner(s) may want to limit the degree of competition.
- Sensitive Business Information: If an employer has a trade secret that would be easily passed from employee to employer, the previous employer may seek to enforce a covenant not to compete.
What Should Be Included In a Non-Compete Agreement?
A covenant not to complete agreement is usually part of the employer to employee’s general employment contract. It may be signed as a separate agreement. They are usually treated in the same way as any other contract. Non-compete agreements or covenants not to compete contain information such as:
- The names of the employer, employee, and other parties.
- The names of companies or businesses that the worker is restricted from working with (some agreements simply forbid work with any other company).
- How long the agreement lasts.
- Penalties or consequences for breaches of contract.
- Specific instructions regarding litigation and lawsuits.
When Is a Non-Compete Covenant Too Restrictive?
It is difficult to determine whether a judge will enforce a non-competition agreement. While the secrets of an employer are valuable, the legal system also places value on an individual's freedom to pursue other employment. To be enforceable, courts usually require that a covenant not to compete be reasonable.
A convent not to compete will be considered unreasonable (i.e. not enforceable) when:
- It lasts for too long. Depending on the trade of the employer, a court will determine how much time is appropriate.
- The geographic area it covers is too large.
- The types of business it covers are too far-reaching. The covenant usually prohibits employment in companies related to the employer's industry.
- The employer does not have a legitimate business interest when enforcing the covenant.
Can a Court Overturn a Non-Compete Covenant?
A court may choose to overturn an overly restrictive non-compete covenant or they may instead chose to “save” the provision by re-writing it in a less restrictive way.
Certain states, such as California, dispute the legality of non-compete covenants as a matter of public policy. In those states, courts will overturn the provision unless the employer can meet at least one of the state’s exceptions to non-compete covenants.
What If I Refuse to Sign a Non-Compete Covenant?
Generally, an employer can end a relationship with an employee or a prospective employee if the employee or candidate doesn’t agree to a legal term of a contract. However, in states that dispute the legality of non-compete covenants, rejecting or terminating an employee who refuses to sign a non-compete covenant may be regarded as wrongful retaliation.
Do All States Allow Covenants Not To Complete Agreements?
No. Not all states allow covenant not to complete in employment contracts because they believe its unfair to the employee if they are limited in their freedom to work. Some states are contesting the idea of non-compete clauses, stating that it may be unfair to limit workers to employment opportunities in a contract.
An example of this is California's ban on non-compete covenants. Thus, you may wish to check the laws of your state if you have any questions or concerns regarding a non-compete covenant. You may also wish to hire a lawyer if you need further advice.
Do I Need an Attorney?
Before signing anything that may restrict your future employment access, it is wise to have an attorney review the document. An experienced employment lawyer can also advise whether you can go work for a competitor under your current employment contract.