The internet and social media have made it easier than ever for recruiters to contact employees and entice them to move on to other companies. According to Qualtrics, top-performing employees are contacted with other employment opportunities on average 4.3 times a year, and about 88% of those employees will reply to the inquiry.
With a high chance that an employee will leave for greener pastures, it makes sense that companies want to prevent these employees from using the confidential business information they learned in their current position to gain a competitive advantage at another company.
While it’s understandable why a company would want to use a Non-Compete Agreement (or a non-compete clause in their Employment Contract) to guard their business secrets, the agreement has to be reasonable. It shouldn’t include anything that is too broad or would otherwise prevent someone from making a living. This post outlines 3 common terms you can’t add to a Non-Compete Agreement. As a general rule, a non-compete clause that would cause a negative effect on the ability of an individual to find work or make a living is likely to be considered unreasonable.
1. Unspecific Time Periods
A Non-Compete Agreement can’t last forever, so an employer must put a reasonable period in the agreement. It would be unreasonable for an employer to expect a former employee to follow the rules of the non-compete indefinitely.
A reasonable amount of time for a non-compete can be anywhere between 6 months to 2 years, and the amount of time the employer chooses will depend on the type of work and the industry.
For instance, a telecom company might say that if their marketing director leaves, they cannot work for a competing telecom company for a period of 6 months due to the fact that it would be possible for the former marketing director to use their insider knowledge of their previous employer’s upcoming sales or promotions to influence the sales or promotions of the new company they are working for.
However, it would be unreasonable to expect that the marketing director could never work for a competitor at any time in the future, so not stating a specific period of time that the non-compete will be effective for would most likely make the agreement unenforceable.
2. Unreasonable Geographic Restrictions
Sometimes, companies feel that it is necessary to include a geographic restriction in their Non-Compete Agreement. A geographic restriction means that the employee cannot compete with their previous employer or solicit clients that were doing business with that employer within a specific area.
For example, let’s say that the owner of a local coffee shop has decided to sell their business. The coffee shop owner was able to build a significant customer base over the years, getting to know many of his customers personally.
In the purchase/sale negotiations, the buyer is entitled to add a clause to the non-compete to specify that the seller can’t open a new coffee shop in the same area to prevent the seller from poaching customers from their former business. The geographic restriction, however, has to make sense. It would not be reasonable to prevent the seller from opening a coffee shop in an area where the buyer wouldn’t be conducting business (like the other side of town).
Similarly, if a company in California includes a non-compete clause in its Employment Contract that forbids an employee from seeking work in a specific industry within the state of California if they leave the company, it would most likely be considered unreasonable by a court of law.
3. Unreasonable, Vague or Ambiguous Activity Restrictions
Non-Compete Agreements often include activity restrictions to protect their business interests. However, the nature and type of activity usually needs to be outlined in a specific and pointed way.
For example, an employer can’t include a clause in their non-compete which states that if an employee leaves, they can’t take any job where they would have to use a computer to complete their work. Since computers are an essential tool at basically any job, it would be unreasonable to expect a former employee to work at a job that doesn’t use them.
“Reasonable Person” Test in Non-Compete Agreements
A Non-Compete Agreement should be able to pass the “reasonable person” test, which is a generic term that is sometimes used in law as a hypothetical standard to determine if an average person’s judgment would think that something is fair or unfair.
As long as the agreement contains terms that are considered to be fair given the circumstances, then it has a better chance of being enforceable.
Using Non-Compete Agreements
Non-compete agreements are used by companies to prevent the spread of confidential information that could be used by a former employee to gain a competitive advantage against their former employer. But non-competes must be reasonable and can’t prevent someone from making a living, so it’s important to ensure that the terms listed in the agreement are fair for everyone involved.