With Massachusetts contemplating the ban of non-competes, to Amazon suing an employee for breaking their agreement to go to Google, no-competition clauses are a well-known topic of interest in employment law right now.
So, just how enforceable are these strict “no competition” rules for employers and employees alike, and what do you need to know when it comes to using or abiding by these clauses?
What is a non-compete clause?
A non-compete clause in an employment contract was originally intended to protect confidential company information, such as intellectual property, client lists, or financial data, from leaking to competitors through employees. It generally means employees are not allowed to go and work for the competition for a predetermined period of time after they have worked for a current employer.
In an employer’s eyes, non-competition clauses mitigate the risk with hiring and entrusting private material to employees. These clauses can also be found in consulting or contractor agreements, where risk might seem especially high when hiring someone temporarily to complete a project.
For employees, non-compete clauses were once only reserved for executives, partners or officials—jobs where information was held in high regard and if compromised, could leave employers financially liable for lost clients or at risk for ideas being copied.
Nowadays, non-compete clauses are showing up in almost all industries. The reason for this trend may be that there is more to protect, or that the means of relaying this information has become easier (ie. Internet). It could also be that people are valuable commodities and losing talented minds to competition is a great hit, not only because they are an asset, but because the worry is that they will take what they know about Company A and use it at Company B.
Are non-competes enforceable?
This is a very common question, and is popping up quite often with the buzz of high level cases regarding non-competition and employees “jumping ship” to other similar companies.
In any case, it depends on the circumstance. Each situation is slightly different. Courts want what is reasonable for both parties. Judges will look at several factors when deciding on a ruling for these types of cases, including:
- Local or regional restrictions: Generally, outlandish geographical restrictions (such as state-wide) won’t be enforced because it is unreasonable to the employee. A local area restriction may pass, so long as it is necessary to protect the employer.
- Time period restrictions: While there is no limit on the time period an employer can specify, the longer it is, the more likely it won’t be fair to the employee.
- Type of industry, work or specific company: Businesses who have direct competitors may indicate the company they don’t want employees going to, however an employer can certainly not put restrictions on the field of employment in general.
- Circumstance: Sometimes non-competes will be contingent on whether the employee was terminated or if they left the company voluntarily.
- Economy: If the non-compete clause interferes with the local economy, such as putting another company out of business or restricting the competition, it may not be enforceable.
- The employee’s ability to find work: An employee should be able to find a job after leaving their current one. If the court finds the non-compete too restricting in this sense, it will not hold up.
- Too broad or unnecessary: If the employer has created unnecessary restrictions on its employees, the court will not uphold the non-competition clauses. For instance, if they forbid the employee from finding work with a competitor in the entire state for a period of four years.
- Type of work being done/job position: If an employee doesn’t have access to confidential information or trade secrets to begin with, the non-competition clause may be deemed unnecessary to begin with as they don’t pose a threat to leaking sensitive material.
Non-compete clauses are not allowed in certain states, such as California, except in very strict circumstances. Always check with your state employment laws before using non-compete clauses or signing a document with one.
Prospective employees: If your future employer asks you to sign an employment contract with a non-compete clause, make sure you read the fine print and ask yourself if the non-compete clause is relevant to your job, fair and reasonable to you as an employee.
Employers: Using non-competes is a way to protect your confidential information, but it should not be used where it is not warranted, nor should the terms be unreasonable. In fact, the clause should only be used when absolutely necessary. In other words, would a judge deem your terms fair to protect your company?
Non-competes are a common employment topic right now because as the world heads digital, competition heats up, and employees change jobs more frequently, there is a stronger need to keep secrets locked down and valuable employees at your company.
Have you ever signed an employment contract with a non-compete clause or a non-compete agreement? Please comment below!