Employment contracts are signed agreements between an employer and an employee. It outlines the terms of employment, and although not every employer and employee relationship utilizes a contract, they are useful tools used to clarify many of the issues that could arise from such a relationship. Employment contracts establish the rights and responsibilities of both parties, as well as provide a protocol for resolving issues and is legally binding for both parties.
Under some specific circumstances, a non-compete contract may be formed between an employer and an employee. A non-compete contract requires the employee to refrain from working with the employer’s competitors, and may also place limits on the type of employer information or private trade secrets that could be released to other competing companies.
A non-compete covenant, or clause, may also prevent an employee from opening a competing business for a specified amount of time after leaving the company. Some examples of provisions that may be found in employment contracts that are intended to protect companies include:
- Sensitive Business Information: Client lists, demographics, business practices, forthcoming products, marketing plans, future events and releases, etc.;
- Confidential Information: Trade secrets, employment operations, etc.;
- Trademarks: This also includes copyrights; and
- Employee Investment: This refers to the expense of specialized training for employees.
Before an employee begins working for an organization, an employer will often require that they agree to a non-compete clause. However, such clauses may also be required for recently terminated employees, as well as former employees. Many states have laws that govern the specifics and ethics of non-compete contracts in an employment situation. That being said, many states disapprove of these contracts due to the fact that they are seen as limitations on an employee’s right to earn their own living.
Are Non Compete Contracts Enforceable Against Employees?
As previously mentioned, whether a non-compete contract is enforceable depends on the state in which an employee works. If a specific state maintains a statute governing non compete clauses and contracts, then the contract will be enforceable according to the state’s laws. If the employee violates the statute by breaching their contract, they could be subject to legal consequences such as a monetary fine. An example of such a breach would be if the employee provides a competitor with closely held trade secrets belonging to their employer. Such actions would likely be in violation of the law.
Alternatively, some states such as California do not allow non-compete contracts at all. As such, it would be illegal for an employer to require their employees to submit to such a contract. If an employer attempts to enforce a non-compete clause in a state that does not allow non-compete clauses, it is the employer, and not the employee, who will likely be held liable for the violation. Additionally, some states such as New York place heavy restrictions on the exact type of non compete clause that could be enforced.
Some states allow third party competitors to be subjected to non-compete contracts. An example of this would be if an employee signs a non compete clause with their employer, and a competing employer then hires the employee with the knowledge that they are causing them to breach their non-compete contract. In such circumstances, the competing employer could also be in violation.
What Are the Requirements for a Valid Non-Compete Contract?
In states that allow for such clauses, the agreement must be reasonable and adhere to several criteria in order for a non-compete to be enforceable. These criteria make it easier for courts to enforce a non compete, and include:
- Reasonable Time Restrictions: Most non-compete clauses state a period of time in which the employee must refrain from competing with their employer’s competitor. This time restriction must be reasonable, with what constitutes reasonable varying by industry;
- Reasonable Geographic Scope: One of the main purposes of a non-compete is to limit the area in which an employee can work once they leave the company. National non-compete contracts are sometimes considered reasonable for industries that operate worldwide. However, states that do not allow non compete contracts may refuse to enforce an out of state clause;
- Narrow Class of Customers and Competitors: More specific clauses are more likely to be upheld. Limiting the contract to customers with whom the employee had close contact would be considered reasonable; and
- Adequate Consideration: This refers to the employee receiving some form of compensation at some point, in exchange for agreeing not to compete. This could take the form of a promotion or raise during their employment, or compensatory pay upon their leaving the company.
Do I Need an Attorney for Non-Compete Employment Contracts?
If you are being presented with a non-compete employment contract, you may want to consult with a skilled and knowledgeable employment attorney. An experienced employment law attorney can verify the legality of the contract, as well as advise you on your options and responsibilities under the contract.
Additionally, if you feel that you have been wronged due to your non-compete, an experienced employment attorney can help determine your best course of legal action. An attorney can file the necessary legal documents to initiate the lawsuit, and can represent you in court as needed.