No employer wants to find themselves competing with a former employee. Nor do you want valuable inside information, strategic plans or trade secrets shared with a rival company. So, how do you craft a non-compete agreement that’s both effective and enforceable?
It’s all about the word “reasonable”
Courts have long attempted to balance the interests of employers and departing employees in deciding whether a non-compete agreement should be upheld. There are commonly three factors a court will examine when hearing a non-compete case:
1) Time. You obviously can’t restrict a former employee from competing forever. The period considered reasonable typically ranges from one to three years, depending on the industry. For example, in high-tech businesses where information changes so quickly, the length of a non-compete contract is often on the shorter side.
Also consider how long the worker was employed by your organization. According to attorney Barry Kozyra of Kozyra & Hartz in Livingston, NJ, “It’s unreasonable to take somebody out of the workplace for one or two years if they only worked at your business for a month. You would have to demonstrate that you have very fragile intellectual property or confidential information that could be stolen.”
2) Geography. You can make restrictions where your company does business, but probably not nationwide or worldwide. One exception is internet or software companies that operate internationally, where courts have found broader geographical restrictions to be reasonable.
Explains Kozyra, “We routinely see situations where an employer wants to restrict someone from working anywhere on the planet because the company has such wide-ranging reach. While it’s not commonplace, it can hold up in a court if the company has very unusual intellectual property, or information that can be disseminated without recourse to another country or continent.”
3) Scope. No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills they’ve acquired over the course of their career.
Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can’t be restricted from taking a sales job at another manufacturer’s showroom.
Interestingly, non-competes are enforceable in NJ against all employees except attorneys. Adds Kozyra, “Some states also don’t allow non-competes for doctors, because there’s a shortage in many areas of the country, and the need for medical care and specialists can have a huge impact on public health and safety.”
Know your state’s requirements
Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them at all. Others stipulate timing, for example that employees must enter into an agreement upon hiring rather than after they give notice to quit a job.
If you’re a multi-state entity, be sure to choose your terms wisely and put them in writing, Kozyra advises. “If you do business in more than one state, you’re able to designate the law of one state and the jurisdiction of one court to apply to the contract.” Most organizations, he says, will choose the state with terms that favor the employer over the employee.
Remember — employees will come and go. But you can take steps now to prevent your valuable intellectual property or your clients from walking out the door with them. The information above should not be considered legal advice, so be sure to consult with your legal advisor for assistance in drafting a non-compete agreement, or if you feel a former employee’s conduct is in violation of your current agreement.