Some employers will require new employees to sign a non-competition agreement before they begin work. (Similarly, when selling a business, the buyer often asks the seller to sign a non-compete.) The non-compete agreement prevents the employee from using their knowledge gained from one employer for the advantage of another company. A non-compete agreement usually takes effect when the relationship between an employee and the employer has ended. There is a public policy tension that makes courts reluctant to enforce non-competes where it imposes an undue or unfair restriction on an employee’s right to earn a living. For a non-compete clause to be upheld in a court of law, it must be narrowly crafted to meet the needs of the parties.
Requirements for a Non-Compete Clause to be Legal
For a non-compete clause to be considered legal, it must have the following key elements:
- Supported by consideration when it is signed
- Protect the business interest of the employer
- Be reasonable in scope of time and geography
- Involve a job description that is more than a “common calling”
For a non-compete clause to work, it must be supported by valid consideration. Consideration is something of value exchanged for something else of value (such as money exchanged for services). If an employee is to refrain from competing against the company in the future, the company must “purchase” that restriction on the employee by exchanging something of value.. Typically offering employment with sufficient compensation and benefits is all the employee needs, but when they do leave the organization, there must be clear direction about what they can and cannot do, where they can and cannot do things, and for how long after employment.
Protection of Business Interests
When a company has an asset, such as private company information, the company will often want to protect that information. When an employee is hired by the company, part of their job may require that they keep certain information confidential, and will sometimes have the employee agree to certain restrictions on the employee’s future use of that information. Among the things a business can restrict are: (1) certain kinds of competition; (2) hiring away company employees; (3) soliciting company clients or customers; and (4) sharing confidential or proprietary information. If an employee is contractually constrained from engaging in one or more of these activities and violates those contract terms, the company can sue the employee. Often, litigation involving allegations of violating these types of restrictive covenants is expensive and drawn-out.
Crafting a Reasonable Agreement
One of the most important aspects of creating an employment agreement is to be reasonable with your terms. The court will balance the employer’s need to protect business interests with any burden the agreement would place upon the employee.
For more information about employment agreement and non-compete clauses, contact Willow Creek Law (801)233-0606.