Although an employee non-compete agreement is disfavored as against public policy because it discourages commerce by restricting an employee’s right to work elsewhere or set up a competing business, generally such contracts have been enforceable if they’re reasonable in scope.
What’s a reasonable scope for an agreement not to compete?
Although there is no hard and fast rule because the laws vary by state, generally the scope of a noncompete agreement is considered reasonable if:
(a) it is for a short term (e.g. 1 to 3 years);
(b) covers a geographic area that’s consistent with the area where your company does business; and
(c) it only limits the same type of work as the employee is doing for you.
Consideration for a valid non-compete agreement.
In addition to being reasonable in scope, the employee must receive consideration (something of value) in exchange for signing the noncompetition agreement. In most cases, this can be satisfied by making the offer of employment to a job applicant conditional upon an agreement not to compete.
However, Dallas Business Lawyer Mike Young cautions against making the noncompete agreement a separate contract from the employment agreement instead of making it part of the employment contract. He said, “If you have a covenant not to compete as a separate contract, the employee may argue that there was no valuable consideration received in exchange for it. In Texas, that’s a difficult claim to make if the noncompetition covenant is within the employment contract itself.”
Related Article: Joint-Employer Liability – How To Avoid It As A Business Owner
Post-Hiring Noncompete Agreement
After an employee has been working at your company for a while, you may decide you want to protect your business by having the employee sign an agreement not to compete. This means that you’ll need to provide some valuable consideration to the employee beyond continuing his employment if you want the noncompetition agreement to be legally binding.
Your business lawyer can help you come up with the type of consideration that makes the contract binding but without costing you a fortune in the process. Common types of consideration given in exchange for a noncompete agreement to an existing employee include:
- a small raise;
- extra paid time off (PTO); or
- increased employer contributions to the employee’s 401k.
Rather than incur an ongoing increase in expenses, some employers prefer to provide a lump sum monetary payment or pay for a short vacation as the consideration for the covenant not to compete.
Related Article: Can A Job Interview Create A Verbal Employment Agreement?
Are There Employees Ineligible for a Noncompetition Agreement?
Under the guise of protecting the consumer, there’s a recent trend by states attorneys general to crack down on employers who force low wage employees with minimal skills to sign noncompete agreements as a condition of employment.
For example, both the Illinois Attorney General and the New York Attorney General recently went after fast food franchisor Jimmie Johns for requiring low level employees to sign 2-year noncompetes that barred the employees from working for a competitor within two miles of a Jimmie Johns’ sandwich shop. In June 2016, Jimmie Johns agreed to stop this practice.
Had the sandwich shop franchisor limited its noncompetition agreements to executives and other upper management, it’s unlikely the chain would have been targeted by either state’s attorney general.
What About Independent Contractors and Covenants Not to Compete?
According to Business Lawyer Mike Young, there are additional dangers when having an independent contractor sign a non-compete agreement. Attorney Young contends that making an individual who is an independent contractor sign an agreement not to compete can be a factor used by a court or government agency to determine the individual is actually your employee. This can lead to liability for additional taxes, unemployment compensation, and workers’ compensation.
How to Get a Good Non-compete Agreement
Whether you want to use a noncompete agreement with a prospective employee, an existing employee, or an independent contractor, your business lawyer can advise you whether it’s feasible and draft a contract that’s designed to protect your interests from unwanted competition by your workers.
