In today’s competitive and disruptive business environment, many forward-thinking employers utilize non-compete agreements as a part of their long-term strategy. As a tightening talent market and the employee skills gap widen, employers should consider the implications of a future employee departure. A study by McKinsey found that 87% of companies say they have current skills gaps or expect to within a few years. Employers will tackle this challenge by spending on human capital investments, revealing hard-won secrets, and fostering the free flow of business information.
A Non-Compete Agreement Should Include Three Things:
Consideration: What is each party getting out of the transaction?
The legal term “consideration” means that the parties bargained with one another and are getting something of value out of the exchange. The non-compete agreement itself is one side of the bargained-for-exchange, but the employee must also gain something of value. When a prospective new hire signs a non-compete agreement, they promise not to compete with the employer in exchange for the employment itself. On the other hand, when an employer wants a current employee to sign a non-compete agreement, the employer would be prudent to offer some form of consideration in exchange, whether it is an increase in pay, bonus, or otherwise.
Reasonableness: Is the agreement fair, or could it be too restrictive?
Courts generally frown upon overly broad restraints on the employee’s ability to earn a living (e.g., a laundry list of blanket restrictions on the employee will almost certainly be unenforceable!). Rather, the agreement should be narrowly tailored with precision to provide sufficient protection without unreasonably restricting an employee’s activities after departure. Courts usually analyze if a non-compete is reasonable by scrutinizing the duration, geography, and protected activities subject to restriction.
What is reasonable depends on the nature of the employment relationship. For example, consider a handsomely paid, high-level executive who is privy to troves of proprietary information, has access to many high-value contacts and performs duties on a wider geographical scale. This executive will likely require a non-compete with a longer duration, larger geographical scope, and greater sum of protected activities as the least restrictive means of minimizing damage from the unlawful competition.
Legitimate Business Interests: What exactly am I trying to protect?
Courts analyze the totality of the circumstances when determining whether a legitimate business interest exists. For example, employers generally claim a legitimate business interest in protecting confidential information, business relationships, specialized training, and goodwill. However, courts won’t find an argument compelling if, after reviewing the facts, your business interests aren’t legitimate. For example, take an employer phasing out of one market to focus on another. Although legitimate business interests may exist before the phase-out, the company—by definition—no longer has an interest in protecting its participation in the previous market.
The Law is Always Evolving
While non-compete agreements are permissible in most states, different states have different enforcement mechanisms, restrictions, and exceptions.
State-level Considerations
There is a trend of states altering laws regarding the enforceability of non-compete agreements. Many states will enforce a non-compete agreement if it passes the muster of the questions outlined above. Other states scrutinize non-compete agreements more aggressively with laws that limit the duration of the agreement to a maximum number of months, limit the agreement to only certain kinds of employees, or require the employer to provide a certain amount of days for the employee to review the agreement.
Federal-level Considerations
In July 2021, President Biden signed an Executive Order calling on the Federal Trade Commission to rein in employers who deploy unfair non-compete agreements. In addition, the US Department of Justice recently expressed an eagerness to “highlight the antitrust implications of post-employment restraints” in a recently filed Statement of Interest regarding a pending state case. While both actions on behalf of the legislative and executive branches are recommendatory and do not affect current laws, they suggest that a change in the law may be in the cards.
When it comes to non-compete agreements, the devil is in the details. It is especially important to have an experienced employment law attorney draft or regularly review existing agreements in today’s dynamic regulatory landscape to ensure enforceability and avoid common pitfalls. So, if you’re an employer looking to arm yourself against unfair competition and need an experienced employment law attorney, contact The Crone Law Firm.
Employment Lawyers are Ready to Help
If you are a business owner looking to protect your company’s confidential information or goodwill, we can help draft effective non-compete agreements. You can count on the skilled legal team at the Crone Law Firm to help you. Whatever the case, we’ll work with you every step of the way. We’re your attorneys and your unwavering supporters. You can contact us by filling out the online form or calling us at (901) 737-7740.