How To Know if a Non-compete Agreement Is Reasonable

Starting a new job is an exciting moment in a person’s life. For some, it’s a fresh start. For others, it represents years of hard work finally paying off.

That’s why it can almost feel inappropriate to think about your next job opportunity before the first day of your new one, but it’s something you may need to do when your new boss hands you a Non-Compete Agreement to sign.

A Non-Compete Agreement is usually part of an Employment Contract for new hires. A Non-Compete Agreement helps protect a company’s intellectual property; it keeps employees from taking company information and secrets with them to a competitor or using them to start their own business. According to a 2019 study by the Economic Policy Institute, approximately 50% of U.S. employers require employees to sign a Non-Compete Agreement.

While this sounds reasonable in theory, some employers use the agreement as a way to handcuff you and limit your future job prospects. The strategy simultaneously discourages you from leaving the company and hurts its competitors' talent pool when recruiting.

In July 2021, President Biden’s Administration released an Executive Order that called upon the Department of Justice (DOJ) and the Federal Trade Commision (FTC) to “curtail the use of unfair non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” (Section 5g) in order to promote fair market competition and reduce industry monopolization. Furthermore, some states, such as California, North Dakota and Oklahoma completely ban non-compete agreements. Whereas other states, like Oregon (Senate Bill 169) and Nevada (Assembly Bill 47 § 22.5(7)), have even passed laws that severely limit the enforceability of non-compete agreements.

That's why it's important to know the features of a fair Non-Compete Agreement in your state before you sign on the dotted line. You wouldn't want to eventually end up in court so that you can continue working in the state you currently live in.

The “reasonable person” test

Luckily, there are limitations to an enforceable Non-Compete Agreement, so you aren't at the mercy of your new employer forever. The agreement can't be unreasonable, vague, or ambiguous about activities. In other words, it needs to outline any restrictions to your future employment opportunities specifically, and it can't be so broad that you can't find a new job.

One way of determining whether a Non-Compete Agreement will hold up in court is to apply the 'reasonable person' test. This is a generic law term that sets a hypothetical standard for deciding if an average person's judgment would decide 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.

Unspecific Time Periods

Unfair time restrictions are one way employers can hurt your ability to find a new job within your current industry.

A Non-Compete Agreement typically lasts six months to two years, but varies depending on your state’s laws. A judge is likely to find anything longer than that to be unreasonable, and an indefinite agreement is out of the question.

For instance, a telecom company might say that if their marketing director leaves, they can't work for a competing telecom company for a period of six months. This restriction is due to the fact that the former marketing director can 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’s unreasonable to expect the marketing director to never work for a competitor at any time in the future, so not stating the specific period of time that a non-compete is in effect would most likely make the agreement unenforceable.

Unreasonable Geographic Restrictions

Another strategy employers use to limit your career options is to place geographical restrictions in your Non-Compete Agreement. These restrictions mean you can't compete with your previous employer or solicit clients that were doing business with that employer within a specific area.

Although this is a common feature of non-competes, there are limits to how wide an area they can prohibit you from working in. The geographical limitations are sometimes defined by the radius surrounding a company's headquarters (e.g., you can't work for a company located within five miles of your previous employer). Other limitations might prohibit you from working in specific cities or states the company does business in. What's considered a reasonable limitation depends on the industry and services provided.

For example, let's say that you're the owner of a local coffee shop and decide to sell your business. While in business, you built a significant customer base over the years, getting to know many of your customers personally.

In the sale negotiations, the buyer is entitled to add a clause to the Purchase of Business Agreement that specifies you can't open a new coffee shop in the same area. This is to prevent you from poaching loyal customers from your former business. The geographic restriction, however, has to make sense. It wouldn't be reasonable to prevent you from opening a coffee shop in an area where the buyer wouldn't be conducting business (like the other side of town).

Affecting the economy

There are also factors in the creation of a Non-Compete Agreement that might go beyond what’s directly best for you but still work in your favor.

Free and fair competition is part of the American dream. This means a company can’t use a Non-Compete Agreement to eliminate all potential competition and form a monopoly in a specific area.

For example, suppose a young electrician works for the only electrical company in a small town for five years and feels ready to use their general knowledge of the industry to start their own business. The electrician's current employer can’t use a Non-Compete Agreement to ensure their electrical company remains the only one in town. Another electrical company is good for the local economy because it creates jobs and gives customers more service providers to choose from.

However, the employer could justifiably use a Non-Compete Agreement to prevent the young electrician from using their customer list or hiring the employer's other employees for a specified period of time.

Do the circumstances warrant a Non-Compete Agreement?

Whether you require a Non-Compete Agreement depends on your circumstances and your state’s laws. You aren’t legally required to sign a Non-Compete Agreement just for the sake of it.

The agreement needs to actually be necessary for it to be enforceable. This means you should be in a position with the company to obtain confidential information or trade secrets. If you aren't in a place to do so, you also aren't in a position to leak sensitive information to another company. In this case, the Non-Compete Agreement restricts your future work prospects for no reason.

Sometimes the validity of the agreement is based on the circumstances you left the company under. For example, if you have access to sensitive information and leave the company of your own free will, the Non-Compete is enforceable (to the extent that the restrictions are reasonable). If you're let go by the company, the restrictions placed on you by the agreement may be limited.

Before you sign a Non-Compete Agreement, ask yourself where you see yourself in a few years and how the document will affect that vision. If the time and geographical restrictions are too broad, or you’re simply not in a position to gather sensitive company information, speaking up in the moment and making adjustments to the agreement may save you a headache and legal fees down the road.
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