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Non-Compete Employment Contracts

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What is a Non-Compete Contract?

Under certain circumstances, a non-compete contract may be formed between an employer and employee. Such contracts require that the employee refrain from working with competitors of the employer. Non-compete contracts also place limitations on the type of employer information or private trade secrets that may be released to other competing companies. 

Employers often require an employee to agree to a non-compete clause before they begin working for the organization. However, non-compete clauses may also be required for employees who have recently been terminated and for former employees.  

Many states have laws that govern non-compete contracts in an employment situation. However, many states generally disapprove of non-compete contracts, because they are seen as limitations on an employee’s right to earn their own living. 

Are Non-Compete Contracts Enforceable Against Employees?

As mentioned, it depends on the laws of the state where the employment occurs. If the particular state has a statute that governs non-compete clauses, then the contract will be enforceable according to the state law. 

If the employee violates the statute by breaching their contract, then they may be subject to various legal consequences, such as a monetary fine. For example, if the employee provides a competitor with closely held trade secrets of their employer, then they will likely be in violation of the law.

On the other hand, some states such as California do not allow non-compete contracts at all. Therefore, it is illegal for an employer to require their employees to submit to a non-compete contract. If the employer tries to enforce a non-compete clause in such a state, then the employer, not the employee will be held liable for a violation. Also, some states such as New York place heavy restrictions on the type of non-compete clause that may be enforced by an employee.   

Finally, some states allow third party competitors to be subject to non-compete contracts. For example, suppose that an employee signed a non-compete clause with their employer. If competing employer then hires the employee, knowing that they will cause them to breach their non-compete contract, then the competing employer could also be in violation.

What are the Requirements for a Valid Non-Compete Employment Contract?

In order for a non-compete employment contract to be valid, it must:

  • Be supported by adequate consideration at the time of signing
  • Protect a “legitimate business interest” of the business or employer, and
  • Be reasonable in terms of geography, scope, and time limitations

The term “adequate consideration” means that the employee must receive something of value in exchange for their promise not to work with competitors. With regards to a non-compete contract, the definition of “adequate consideration” may vary depending on the facts. For example, if an employee signs the non-competition contract before working, then the employment itself will be considered adequate consideration for the employee’s promise.

On the other hand, if the non-compete contract is signed after the employment has already begun, the employee must receive something else of value in exchange. That is, the mere promise of continued employment is not enough to support the contract.  The employer must provide some other form of consideration, such as a promotion or pay raise, or other types of benefits that were not part of the original offer of employment. 

Do I Need a Lawyer for disputes over a Non-Compete Employment Contract?

Non-compete contracts for employment are not enforced in every state. If you feel that as an employee you have been wronged due to a non-compete contract, you should contact an employment lawyer for advice. Your attorney will be able to explain the laws of your state very clearly to you. Or, if you are an employer, a lawyer can help you draft a non-compete contract that follows the guidelines of your state’s laws.  

Photo of page author Peter Clarke

, LegalMatch Content Manager

Last Modified: 09-17-2013 03:36 PM PDT

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