Are Employee Non-Compete Agreements Enforceable?
The reasoning behind non-compete agreements is simple: when an employee leaves a company, the contract prevents them from leaking the business’ confidential information to a competitor. This makes sense when non-competes are applied to only business executives, partners, or officials — people who are actually in possession of the trade secrets the agreements are meant to protect. But when the clauses extend to entry-level workers or employees of businesses that don’t trade secrets, things can get messy.
Non-competes are a hot issue right now due to the growth of digital communication, documentation, and higher competition among businesses. Clauses are especially prevalent in such fields as engineering and finance, according to a new working paper by economists at the University of Illinois and University of Michigan, but are also appearing in less obvious fields like lawn care and hair styling.
But as with other company-specific laws, such as Ban the Box legislation, it’s often difficult to establish where the line between being enforceable and being unreasonable is for non-compete agreements. State laws, time and geographic restrictions, employee rank, and industry type are all things that must be considered when determining whether or not a non-compete agreement is enforceable and/or necessary.
To help navigate the complicated world of non-compete agreements, below we define exactly what a non-compete agreement is, outline what they entail, provide examples of what is and is not (generally) enforceable, and link to a sample of a standard non-compete contract.
What Is a Non-Compete Agreement and Why Are They Used?
A non-compete agreement is a type of restrictive covenant. Essentially, it is a promise by an employee to not work for competing businesses in a specific region for a specific time period following termination of employment.
Employers use non-compete contracts to keep confidential information — intellectual property, client lists, financial data — safe from competitors. They see the agreements as a way to mitigate the risk of hiring and entrusting private material to employees, consultants, or contractors.
The goal of non-competes is to provide an employer protection from unfair competition (competition involving the “misappropriation of good will” — a.k.a. stealing an employer’s relationship with customers, clients, or vendors and/or confidential business information) while not unreasonably prohibiting a former employee from earning a living.
What Is Included In Non-Compete Agreements?
Non-competes specify the geographic scope, duration, and type of activity an ex-employee is prohibited from engaging in. For example, a car salesman might have a 50-mile non-competition radius so as not to steal customers from his or her previous dealership. A TV news reporter, on the other hand, might be forbidden from working for other local television stations for a period of time following termination; time frames can range anywhere from a few months to two years.
When Are Non-Compete Agreements Enforceable?
Here’s where things get tricky. Whether or not a non-compete agreement is enforceable depends on whether or not it is reasonable, and what is reasonable is determined by state courts on a case-by-case basis; every state has its own laws regarding non-compete clauses.
Non-compete agreements are typically considered enforceable if they:
- Have reasonable time restrictions (generally less than one year)
- Are limited to a certain geographic area (specific cities or counties, rather than entire states)
- Are necessary to protect certain employer interests, including trade secrets, confidential business information, and the company’s relationship with customers, clients, and vendors (including market position and reputation)
- Are "supported by consideration," meaning an employee receives a benefit (additional compensation, stock options, acceleration of benefits, etc.) in exchange for promising to not work for a competitor
Non-compete agreements must also be industry specific in order to be enforceable. For example, a newspaper writer could be barred from working for the other local newspaper, but not writing novels, even though that uses many of the same skills.
Technically, a standard non-compete contract is more likely to be upheld if the time limitation is short, the geographic scope is small, the type of activity is narrow, and the employee is only prohibited from soliciting their former employer’s established customers.
When Can Non-Compete Agreements Be Disputed?
Non-compete agreements can be disputed and are unenforceable whenever they are too restrictive — which is often. Every state has its own laws about whether or not non-compete agreements are enforceable. Some, like California, have deemed them illegal except in the sale of a business or a shareholder’s stock or dissolution of a partnership. Others, like Wisconsin, Nebraska, and Arkansas, allow reasonable agreements but will invalidate contracts that are too broad.
This chart outlines each state’s laws and rules about whether, when, and to what extent a non-compete agreement is enforceable, and demonstrates the complications involved in determining enforceability. It includes information like:
In general, courts will rule in favor of an employee in cases determining the reasonableness of a non-compete agreement. Some of the
factors judges look at when deciding on a ruling for these cases include:
- Geographical restrictions (state-wide won’t be enforced, but a local areal restriction might, if it is necessary to protect the employer)
- Time period restrictions (the longer it is, the more likely it will be deemed unfair)
- Type of industry, work, or specific company (businesses with direct competitors may indicate the company they don’t want employees going to)
- Circumstance (whether the employee was terminated or left voluntarily)
- Too broad (unnecessary restrictions, usually pertaining to geographic or time limits)
- Type of work/job position (if an employee doesn’t have access to confidential information or trade secrets, the non-competition clause may be deemed automatically unnecessary)
For prospective employees, it’s always a good idea to read the fine print of a non-compete contract. When doing so, ask yourself if the clause is relevant to your job, if it is fair, and if it is reasonable to you considering your location, position, and job responsibilities. Here’s an example of a general non-compete contract, and the stipulations you might encounter.
For employers, non-compete agreements should be used only to protect confidential information and only when absolutely necessary. If you do decide to require a non-compete, make the requirement known in a prospective employee’s offer letter. This inherently fulfills the consideration aspect of the agreement, with the benefit for the employee being the job. Asking employees to sign a non-compete later on in their tenure, or following a promotion, means a benefit must also be included (raise, bonus, stock options, etc.), which adds additional complications to an already complicated process.
So, are Non-Compete Agreements Actually Enforceable?
Non-compete agreements are complicated and multifaceted deals. In some cases, such as in the sale of an entire business, they are necessary and practical. In most situations, however, they are unreasonable and unenforceable. Being aware of state laws and the specific requirements outlined in a non-compete agreement are the best ways to avoid messy legal disputes and maintain positive employee–employer relationships.
