Have you asked an employee to sign a noncompete agreement? This contract limits the competition you will face from employees leaving the firm. But how far can you go? Can you force an employee to agree to any terms?
First, understand that some states frown on these agreements, not allowing them at all. Even states that recognize these covenants won’t enforce them if they last too long, cover too much geographic territory or place too many limits on an employee’s right to move on without leaving his or her chosen profession. California not only sees noncompete agreements as unenforceable, but it also provides that employers can be sued for even asking an employee to sign one.
Just what is reasonable?
How reasonable is the agreement? This is an important point. Even states that recognize noncompetes may not enforce one that contains a lot of restrictions. Agreements that limit an employee’s options in the future must be reasonable in scope:
- In terms of time — There’s no clear-cut rule, but agreements that last just a year or two are more likely to be upheld than are covenants that extend well into the future.
- In terms of area — Does the noncompete agreement apply to a limited geographic region where competition would undermine the employer’s business? How large an area is reasonable will depend on the industry.
- In terms of what counts as competition — Is there a short list of direct competitors? Or are you prohibiting an employee from starting a new business in your field?
A noncompete agreement, by its very nature, can limit someone’s right to earn a living. That’s why you should require one only if you see it as necessary to your business. If an employee has access to your trade secrets and knowledge of how your business runs and then uses that training against your company, you may want to take action to limit damage to your business.
Keep in mind that noncompete agreements are contracts. What are you giving employees in exchange for their fealty? Courts generally say that the job is sufficient reward if getting the position is contingent on their signing the agreement. But if you’re asking for a noncompete agreement from people who are already employees, you may want to consider offering an additional benefit — such as a promotion or a raise — because you’re asking them to sign away some of their rights. Canny employees may ask for a severance package upfront.
At the federal level, the White House published a report on noncompetes in 2016 that held that they can impose substantial costs on workers, consumers and the economy. And there’s legislation afoot prohibiting the use of restrictive covenants for low-wage employees. Experts say changes may restrain employers from relying on noncompetes to protect business interests.
The bottom line? Don’t draft and present noncompete agreements to current or potential employees unless you feel it’s really necessary, and even then, get qualified legal advice.