Enforceability of Non-Compete Work Agreements
UPDATED: June 19, 2018
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A non-competition agreement is what it sounds like: it is an agreement stating that an employee cannot compete with his former employer by going into the same business. Many employers require employees to sign these agreements as a condition of employment — in other words, to get or keep the job, the employee has to sign the non-competition agreement. Although very harsh in many senses — after all, the essence of a non-competition agreement is to keep, or least restrict, someone from earning a living in their chosen field — they are enforceable. If an employee signs one, he or she can be held to its terms within certain limitations.
Non-competition agreements are only enforceable to the extent they are reasonable in both geographic scope and time duration. Unreasonable agreements will either not be enforced or will reduced by the courts to a more reasonable level if challenged (called “blue penciling”). The goal is to provide the employer some protection from unfair competition, such as someone leaving and immediately using his or her know-how to compete with the company that taught them what they know, while not unreasonably prohibiting someone from earning a living.
What is reasonable is judged on a case-by-case basis. Usually, terms of 6 months to 1 year are considered reasonable, though in the case of company owners who sign an agreement to not compete with someone who buys the business from them, a longer term will often be enforced. Generally speaking, the higher level the employee, the longer the duration that will be considered reasonable for non-competition—senior staff presumably know more valuable and proprietary information, were paid more, have more bargaining power, and are better able to protect themselves.
In terms of geographic scope, the former employer’s market must be determined. This will define the area in which the former employee cannot compete. For example, a hair dresser might be restricted from competing within a ten-mile radius, on the theory that most customers will not drive farther than ten miles for such services, so any area beyond that radius is a different market. A car salesman or a contractor might have a 50-or-so mile non-competition radius, since those services pull customers from further away. A top account or sales executive for a heavy equipment manufacturer might have a non-competition agreement that covers an entire region, or even the whole country, if that’s the marketplace to which the former employer sold.
There must be something posing a risk to the former employer from their former employee’s competition to make any non-competition enforceable. For example, there’s no risk from a receptionist, no matter how good, working for another company, so any non-competition with a receptionist may be unenforceable as unreasonable. Usually —but not always — it’s personnel with significant industry or technical know-how, interaction with customers, or who are “key” employees who have to sign non-competition agreements.
Also, a non-competition is industry and job specific, since the goal is to prevent competition. A top equipment salesman could be barred for competing for a period of time from selling the same sort of equipment, but not from becoming a realtor, for example, even though that draws on many of the same selling skills.
A similar sort of agreement, which is often combined with a non-competition agreement, is called a non-solicitation agreement, and it prevents the employee from marketing or selling to, also known as soliciting, the clients or customers of the former employer. Non-solicits will be enforced for longer periods of time and broader areas than non-competitions, since there is no need or right to go to someone else’s customer list in order to have a chance to earn an honest living.