Covenants not to compete are written agreements signed by employees at their employer’s request, before or after they are hired, which may limit the employee’s ability to take certain types of jobs in the future. These covenants are also referred to as non-compete clauses (included in larger employment contracts), non-competition agreements, and restrictive covenants.
More specifically, the covenants not to compete may keep employees who have quit or been terminated from taking jobs with competing businesses. The idea behind the covenants is that employees gain knowledge of the company they work for, and, upon leaving that company, their employer has an interest in keeping that employee from working for a competitor and using the knowledge they gained about their former company, which could put that company at a disadvantage.
The type of information they might be privy to while working at a company includes: business models, manufacturing processes, methods used in marketing and advertising, details about specific products, and lists of clients or customers along with their contact information.
Covenants not to compete attempt to restrict employees from working for competitor companies, often companies within a certain geographic area that is close to the employer they signed the covenant with. The covenants also typically restrict employees for a certain number of years.
Is there a Public Policy Against Covenants Not to Compete?
Covenants not to compete have been around for hundred of years, but they have often been rejected in whole or in part by the courts. Public policy favors economic freedom and an employee’s right to earn their livelihood, and discourages restraint of trade. This public policy certainly holds true in New York today.
Although New York has no statute making covenants not to compete illegal, judges may decide for themselves, based on certain generally accepted criteria, whether a covenant that is brought to court should be struck down.
Are Covenants Not to Compete Legal in New York?
Yes, an employer can require you to sign a covenant not to compete as a condition of employment. However, not all covenants are enforceable. They must be narrowly tailored so that they are not unreasonable. In general, the language of the covenant must meet the following criteria:
- The employer is protecting a legitimate interest;
- The covenant does not create undue hardship for the employee;
- The covenant isn’t harmful to the public interest (public policy); and
- The covenant is reasonable in the time period for which it restricts the employee, and in the geographic area it restricts.
Covenants that fail to meet the requirements may be struck down by a court. Of course, once the agreement is signed, and employee must take it to court in order to have it (potentially) struck down, which can be burdensome in itself.
Sometimes, a covenant not to compete may be struck down only in part. For instance, the time and geographic area may be unreasonable, if the employer attempts to restrict the employee from working for a competitor across the country, or for a period of 20 years. In those types of cases, a judge may decide that the covenant may stand, but the time/geographic restriction must be modified so it is not as restrictive or burdensome. This is referred to in New York as the “blue pencil rule.”
Overall the court tries to balance the interests of the employer against the interests of the employee, and attempts to preserve the employer’s interests without causing undue hardship to the employee.
How Do You Draft a Covenant Not to Compete?
Employers in New York should exercise caution when drafting covenants not to compete. They should be very specific about the type of proprietary information they seek to protect. They should be short and to the point and clear in meaning, and not meant to confuse the employees who read them.
They should also, as mentioned above, be reasonable in the geographic area and time period in which they restrict their employee’s ability to seek work in the future. New York has been forward-thinking in its public policy interest in allowing employees to seek their own livelihood and is now less likely to uphold overly restrictive covenants.
It is also unlikely that a court will enforce a covenant not to compete for an employee who works in a lower-level position, as opposed to someone in a higher-level position with more access to proprietary information.
Am I Required to Sign a Covenant Not to Compete?
As mentioned above, an employer may require you to sign a covenant not to compete. However, it is very important to be aware of any covenants you sign. Sometimes they are buried in an employment contract, and you may not take much notice.
Upon leaving that employer, you may later find that the covenant is overly restrictive and makes it difficult to find a new job. In that case, you would likely have to take the matter to court in order to get relief.
Do I Need a Lawyer If I Have Questions about a Covenant Not to Compete?
A qualified New York employment lawyer can assist you if you have questions about a covenant not to compete prior to signing it. They may be able to represent you in court if you have already signed a covenant which you believe is unenforceable.