A non-compete agreement is a contract between an employee and employer. A non-compete prohibits an employee from engaging in a business that competes with his/her current employer’s business. While an employer cannot require you to sign a non-compete, he/she may terminate, or choose not to hire you if you refuse to sign. Courts generally do not approve of non-compete agreements. In disputes over non-compete agreements, courts consider certain factors to decide if the agreement is reasonable. If you find yourself negotiating a non-compete agreement consider limiting the agreement to only what is necessary to protect the employer and ask for a severance payment in the event that you are terminated. Learn more about how a non-compete agreement might affect you below.
What is a non-compete agreement?
Non-compete agreements, also known as covenants not to compete or restrictive covenants, are quite common in employment agreements, employment applications, and in contracts for the sale of businesses. The general purpose of these agreements is to restrict the ability of employees who sign the agreement to go into business against the employer within a certain geographic area for a certain period of time. If you sign it, typically you are agreeing that you will not compete with your employer by engaging in any business of a similar nature, as an employee, independent contractor, owner, part owner, significant investor, and whatever other forms of competition your employer identifies to cover its bases.
Am I required to agree to a non-compete agreement?
No. However, not agreeing to a non-compete agreement, may cost you your potential job (or your current job, if your current employer now wants you to sign an agreement that did not apply to your employment before.) If the employer is unwilling to give up on the agreement or alter the form or content to better suit you, you may be not be hired, or you may be fired if you are already employed.
Is it legal to deny me a job just because I refuse to sign a non-compete agreement?
Whether it is legal for your employer to deny you a job or fire you will depend on the facts of each individual case and will vary state by state depending on each state’s laws. It may also depend upon the reasonableness of the proposed covenant not to compete.
What factors do courts look at to determine whether a non-compete agreement is reasonable
While non-compete agreements are analyzed under state law, and each state is different, there are some common factors that courts look at to determine whether a non-compete agreement is reasonable:
- Does the employer have some legitimate interest it is protecting with the non-compete agreement?
- What is the geographic scope of the restriction? Will it keep you from making a living?
- How long is the non-compete agreement in force?
- Does the agreement keep you from doing a type of work very different from what you had been doing?
- Did the employer provide you with additional compensation or benefits in return for getting your agreement to sign the non-compete?
Each state has its own standards with respect to the validity of non-compete clauses. At the federal level, the White House published a 2016 report on non-compete contracts in employment, holding that they “can impose substantial costs on workers, consumers and the economy more generally.”
In a New York case against the sandwich chain Jimmy Johns, the court held that the company’s non-compete preventing employees from working in a similar industry that worked primarily with sandwiches for two years was invalid. In response to this case, there is legislation currently proposed that would prohibit the use of non-compete agreements for employees earning less than $15/hour ($31,200 a year) or the applicable minimum wage in the employee’s municipality. Keep checking back to determine the status of this legislation.
What is considered legitimate business reasons that will justify an employer’s enforcement of a non-compete agreement?
It is not enough that your employer simply doesn’t want you to take your skills and abilities to a competitor. There needs to be some good reason for the non-compete. For example, if the employer introduced you to all its best customers, it may have a legitimate interest in keeping you from going to a competitor and luring those customers away. The goodwill developed in terms of customer relations gives the employer a competitive advantage. They may want to prevent you from capitalizing on it, thus they are entitled to protection.
Or, if you gained certain confidential knowledge that you would inevitably use in the course of working for your new employer, a court may find that to be a legitimate reason to uphold a non-compete agreement.
What is considered a reasonable geographic scope?
It depends. Courts often consider these factors: geographic scope, length of time, nature of duties restricted and consideration – in relation to one another. For instance, a broad geographic scope – say an entire state – may be more likely to be enforceable if the duration of the restriction is short – say a month. On the other hand, a broad geographic scope coupled with a long time period of prohibition is more likely to be held unenforceable by a court. When looking at geographic scope courts examine the services provided by the employer. The court generally will not permit non-compete agreements that prevents an employee from working in a region where the employer does not do business.
What is considered a reasonable duration of time?
As discussed in the previous question, what length of time is considered reasonable will generally be analyzed in conjunction with the other factors. For example, if the non-compete agreement is designed to protect valuable information the reasonable duration is for the time the information has value.
Lifetime bans on a particular area of work have been upheld in unique circumstances, but, generally, courts analyze the “protectable interest” the employer has and will not uphold time restrictions which go far beyond the employer’s “protectable interest.” For more information about the employer’s protectable interest, see the next question.
What is considered a reasonable restriction on the nature of duties performed?
To answer this it is important to define the employer’s “protectable interest.” This is analyzed by courts using tests which vary from state to state. In general, courts look to the following factors:
- the nature of the work performed,
- the length of time the employee was employed by the employer,
- whether the employer conferred special training or education as a benefit of employment,
- whether the employer shared trade secrets with the employee which could substantially affect the employer if used by a competitor,
- whether the information the employee possesses is really kept confidential by the employer, and
- whether the knowledge the employee has is unique to the employer, or of a general nature, such as general sales experience.
There may be are restrictions which are so broad that they eliminate the ability to work at all in a given field or profession. Because in some states constitutions protect the right to earn a living, some courts have held there are state constitutional rights to be able to earn a living, some courts have held that these restrictions should are to be scrutinized very closely.
Does my employer have to pay me additional money in exchange for a non-compete agreement?
The employer seeking a non-compete agreement may, in some cases, pay what is called “consideration”: additional compensation in exchange for the employee or seller agreeing to this provision, or some other non-monetary benefit, such as a change in job duties or responsibilities. However, whether this is required may depend on the law of your state. Generally, your employer does not have to give you additional financial compensation, but not doing so may have consequences when the employer tries to enforce the agreement. Some states require the payment of consideration, while others merely consider it as an important factor for courts to consider when determining whether to enforce the agreement.
I was asked to sign a non-compete agreement after I had already started working for the employer. Is this legal?
Yes. However, whether it is legal for the employer to take adverse action against you – such as firing you or writing you up — for refusing to sign will depend on the circumstances of your case and may depend on whether the agreement the employer wants you to sign is enforceable under the law of your state. Contract law issues in your state may also be a factor in whether an agreement you are coerced or threatened into signing is enforceable. One is whether your employer is required to pay you additional money or give you other consideration as discussed in the previous question.
For example in Ohio, the Ohio Supreme Court held that in the case of an at will employee, continued employment was enough consideration to make the agreement enforceable.
If I have already agreed to a covenant not to compete, can I get out of it?
It depends. The approach of courts to non-compete agreement clauses varies greatly from state to state. Some states are very eager to enforce covenants not to compete and will actively rewrite those which are too broad in geography or time to make them more readily enforceable. Other state courts have taken a very negative view of covenants not to compete and have enforced only those which very clearly were reasonable in geography and in time and which are supported by substantial consideration (the payment of money in return for the agreement.) This approach varies state to state and often depends on the facts of the individual case.
For example in Florida the law supports non-competes, so the facts of your situation, and the state you live in determine where the agreement will be enforced against you.
I had a non-compete in my job, but I was fired. Can they enforce it against me even though they decided to fire me?
It depends. First look at the terms of the non-compete itself. Does it address termination? Assuming it does — and that it says the non-compete still applies even if you are terminated — the next question is: is that legal? Again, the answer is: it depends. If the reason for your termination is employer misconduct – discrimination, illegal activity by the employer or similar misconduct – then most courts have held that a non-compete is no longer enforceable. That is because illegal conduct by the employer was not part of the employee’s expectation at the time he or she agreed to the non-compete. If the reason for your termination is employee fault – attendance, poor performance or similar problems – then the fact that you were terminated will probably not be as significant. Nonetheless, courts may be less eager to enforce a non-compete agreement where it was the employer’s decision to terminate the relationship, not yours.
I had a non-compete in my job, but I quit after they asked me to engage in illegal activity. Can they enforce it against me even though they were doing something wrong?
Probably not. Most courts have held that an employer who is engaged in illegal activity which results in an employee quitting cannot enforce non-compete agreements against the employee who left for that reason.
If the non-compete agreement I signed is enforced, that means I can’t earn a living at all. What do I do?
Courts are very reluctant to enforce a non-compete that is so broad it keeps an employee from working at all. Also, there are courts which have relied on state constitutions to limit the ability of employers to restrict an employee from working at all.
I left my old company to take a job with a new company. The new company didn’t tell me that I had a non-compete agreement until I had already left the old job. Does this mean I’m stuck with it?
It depends. There may be claims you can make against the new employer for not telling you up front that this was a requirement. These claims will vary from state to state and may depend on the enforceability of the non-compete.
All of us here at work have non-compete agreements, but the company has never enforced them when someone leaves. Does that mean I can just ignore it?
Legally no, but it may give you a hint that the employer does not see the cost and risk of trying to enforce the agreement as worth it. It may also be that the employer has decided the agreement is probably not enforceable anyway. That is no guarantee the employer will not try and enforce it in your case, unfortunately. Before you deliberately choose to violate a non-compete agreement to which you are subject, consult a lawyer who can go over the agreement with you and help you assess an appropriate course of action.
Our company was bought out by another company, and now we’re told that we’re subject to non-compete agreements. Can the new employer enforce the agreement against us?
Probably not. Most courts require that you affirmatively agree to the terms of a non-compete – such as by reading and signing it. It is usually not enough for that the employer to just tell you it is there for you to be bound by its terms.
If I violate the non-compete agreement by leaving my employer to go work in the same industry, what can happen to me?
If you choose to leave an employer with whom you have a covenant not to compete, the employer may do nothing. In this case be sure to come to some kind of agreement with the employer so you can do what you want. Additionally be sure to get the employer to release you from your non-compete agreement with a signed document.
On the other hand, the employer may sue you and go to court seeking what is called an “injunction” or restraining order to prevent you from violating your agreement. Because a violation of a non-compete agreement can cause an employer immediate harm, the court will often use expedited procedures in these cases. Once your employer requests an injunction or restraining order it may only be a matter of days or weeks before you have a hearing scheduled before a judge. You may have very little time to retain an attorney and discuss your case with that person, so make sure that you enlist the help of an experienced employment lawyer as soon as you know that your employer is challenging your actions.
What happens at the hearing?
At the first hearing, the court may make a temporary decision to stop you from doing to challenged activity or decide that what you are doing is ok for the time being. A temporary order will only be effective until you come back to court for a more complete, and usually more lengthy trial to decide the matter finally. Alternatively, depending on the facts of your case and your state’s procedures, your first hearing may be the final hearing. The court will hear evidence from you and from your employer and decide whether to issue an order stopping you from engaging in the challenged activity or to deny your employers request and leave you free to continue the challenged activity.
What happens if the court grants the injunction requested by my employer?
If an injunction is granted by the court, this is a legal remedy which can stop you as an employee from working. It can cause you to lose your ability to be employed in violation of the covenant not to compete for whatever period of time the court sets. This can last for months or years until the court reaches a resolution of the final decision on whether the covenant not to compete which the employee signed is actually enforceable or not. Of course, practically speaking, most employees can’t wait months or years without the ability to earn a living, so the T.R.O. hearing is effectively the trial in most cases.
Will I have to pay any money to my employer if I lose?
Probably. Your employer can also seek what is called “liquidated damages” if those are set forth in the non-compete agreement. Liquidated damages are a set sum that the employer and employee agree to as damages if the employee breaches the covenant not to compete. Not all liquidated damages are enforceable under the law, however. This too depends on the facts of each case and the law of each state.
Additionally, the employer can seek any actual damages or losses which they claim have occurred because the employee left in violation of the covenant not to compete – this could include lost profits from customers, the loss of secret employer information and similar losses.
Is there anything I can do to my employer for trying to enforce a bad covenant not to compete?
Sometimes. Again, depending on the facts of each individual case, employees have been successful in bringing legal claims for what is called “tortious interference with business relationships.” This legal claim applies to cases where an employer has cost the employee a job because they have attempted to enforce non-compete agreements which is not actually legally enforceable. Sometimes these “tortious interference” claims can result in substantial damages being awarded to the employee for the employer’s overreaching efforts to stop the employee from finding other work.
Also, there is a strong argument that an employee who is terminated for refusing to sign an unreasonable covenant not to compete could have a claim against the employer for discharge in violation of this public policy of the state. Results from such “public policy” claims vary from state to state.
Is there any other way to find out if non-compete agreements are enforceable?
In most states the answer is yes. Most states provide a mechanism for testing the enforceability of a contract. This mechanism is called declaratory judgment. Depending on the availability of this remedy in your state and the tactics involved in each individual situation, it may make sense for the employee to bring a declaratory judgment action asking the court to determine whether the agreement is enforceable. There are many practical and tactical considerations involved in deciding whether or not you as an employee should initiate a declaratory judgment action challenging a covenant not to compete. No one-size-fits-all answer applies to this issue.
In the sale of a business, it is typical for a purchaser to include in a contract for sale the requirement that the seller does not engage in the same type of business within a certain geographic area for a certain period of time. Whether these types of non-compete agreements are enforceable or not and the degree to which courts will enforce them varies greatly from state to state.
I’m in the process of negotiating a non-compete agreement. Are there certain things that I should be asking for?
The best thing would be to not have non-compete agreements at all. Failing that, you should try and limit it as much as possible in geographic scope and in duration. Limit it narrowly to the area the employer is really concerned about you working in – not the whole industry or line of work. For instance, you might ask that the limitation is to the area of clothing retail if you work in a clothes store, versus retail generally, which would cover a very broad range of possible jobs that are truly unrelated. The goal is to limit the agreement to what is necessary to protect the employer. You should also consider asking for severance pay in the event of an involuntary termination.
Whether an agreement is likely to be valid depends greatly on the analysis of state law as applied to the specific facts of you and your employer’s situation. With so much potentially at stake, if you have any concerns at all about an agreement, it would be wise to consult with a lawyer who is familiar with these types of agreements. Guessing wrong about the validity of the agreement could seriously affect your ability to work and could cost you a lot of money, so you want to proceed carefully.