Non-Compete Agreements Require Expertise in Drafting

Document created by 1002070 on Aug 16, 2015Last modified by 1002028 on Aug 23, 2015
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Pat Rountree.jpgNon-compete agreements serve two primary purposes:  1) Protecting your interests by having new employees sign non-compete agreements as a condition of employment, and 2) making sure in the recruiting process that you determine whether a candidate you are considering is bound by a non-compete from a former employer, and if so determining the effect on employment with your company.  Both the employer and employee can be legally liable for violation of a former non-compete.

 

State law governs non-compete agreements.  Non-compete agreements should be used for those who have access to confidential information such as product design, trade secrets, customer lists, or competitive information that could harm the business if the employee left to work for another employer within the same or similar industry.  The reasonableness of such an agreement depends on its fairness to the employee while accomplishing the need of the employer to protect its business.


Measurements of reasonableness include:

  • length of time the employee is restricted in employment
  • territory restrictions (how broad are they)
  • restriction of activity, and
  • hardship to the employee

 

An overly broad agreement that restricts the livelihood of the former employee may be unenforceable if challenged in court.  Generally, time and territory restrictions work inversely; a broader territory may be reasonable for a shorter period of time; or a smaller geographic restriction for a longer period of time.    For example, an employer attempting to restrict a sales associate from working for any competitor in any position would clearly be an overly broad restriction.  Enforceable non-compete agreements, if required,  should be discussed at the time of hire since these agreements require consideration (something of value) from the employer to make them binding on employees.  At the time of hire, the consideration is employment contingent upon signing the agreement.

 

Seeking to have an employee sign a non-compete agreement after hire requires additional reasonable consideration relative to the rights the employee is giving up.  Options may include a monetary payout, additional paid time off, or be tied to consideration for future wage increases or promotional opportunities along with a monetary incentive. The employee can also refuse to sign the agreement after hire, forcing the employer to choose between firing a valuable employee who can take their expertise to the competitor, or accepting the employee’s decision.

 

A sample non-compete agreement is available in the Members Only CCH Answers Now under HR Compliance Library section (Sample Documents, Staffing); however, because of the importance of this document and evolving case law, legal counsel is advised in developing enforceable non-compete agreements.  Please call our Advice and Resolution team should you have any questions

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