Non-compete contracts are documents prepared by and presented to either potential employees or current employees for signature. They are meant to protect the business from competition or from the sharing of proprietary information, but all too often their language is overly broad or restrictive. It is one thing to try to keep a competitor from having an unfair advantage, and an entirely different matter when, in doing so, an employer effectively prevents their former employee from earning a living.
When a non-compete agreement is improperly crafted, it is likely to be deemed unenforceable, but the elements that make it unenforceable will be highly specific. A non-compete that bars an employee from working in another state may be valid if it is specific to a particular industry or a geographic range (for example if the contract indicates a 50-mile restriction and the state line is just 20 miles away). But the determination of enforceability largely comes down to whether the contract terms are reasonable and are legitimately meant to protect the employer’s business interests rather than being punitive or arbitrary.
The factors that make a non-compete agreement enforceable or unenforceable include:
- Whether it is legal in the state for an employer to require an employee to sign a non-compete agreement. California, North Dakota and Oklahoma prohibit these contracts entirely, while others prohibit or significantly limit their use for low-wage employees.
- Whether the employer has a legitimate need that is met by having the employee sign the non-compete contract
- Whether the employee has been provided with something of value in exchange for their signature. In the case of a new employee, the job itself offers value, while existing employees asked to sign a non-compete are generally given promotions, bonuses, or increases in pay.
- Whether the contract is limited in time. If a non-compete keeps you from working in your chosen field or industry for more than two years, it is likely to be viewed as overly restrictive and unreasonable.
- Whether the contract is limited in the type of work. A non-compete that entirely prohibits an employee from using their specialized knowledge or training is unlikely to be viewed as enforceable.
- Whether the contract is limited in geography. Though a non-compete may prescribe a specific market area as being off-limits for a period of time, it is unlikely that prohibiting an employee from working in an entire state – especially one that is different from where the contract was signed – would be enforceable.
For assistance with determining whether a contract you’ve been asked to sign – or that you intend to ask employees to sign – is enforceable, contact our experienced business law firm today.