Non-competition clauses are common in employment contracts. They’re designed to keep employees from working for competitors for a period of time after leaving a company.
One of the many legitimate uses for such clauses is to protect an employer’s trade secrets. However, for many years, courts voiced a distinct dislike for non-competition clauses and repeatedly refused to enforce them. As a recent case indicates, some of this reluctance to enforce non-competition clauses remains. Still, a well-drafted non-competition clause can survive a court challenge.
Three Elements to Strengthen A Non-Compete Clause
Here are three elements of a non-compete clause that can help ensure courts enforce the provision:
For a court to find a clause reasonable, it must be no broader than necessary to protect your company’s legitimate business interests. In addition, it may not place burdens that make it unreasonably difficult for an employee to earn a living.
When making a determination of whether or not a non-competition clause is reasonable, courts tend to look at two major factors:
- The length of time the clause will be enforced.
- The geographic area over which it applies.
Normally, courts find that agreements limiting competition for one or two years are reasonable. As for geographic scope, it must be limited to an area where the employer actually operates its business, or where the employee operates. For truly national companies, nationwide restrictions have been upheld.
A non-competition clause must be part of an agreement that includes “consideration.” In other words, the employee must receive a benefit in exchange for signing the agreement. This requirement can be met in several ways. For instance, a new hire can be made to sign a non-competition agreement at the start of employment. The job itself is sufficient consideration to make the clause enforceable. For employees that are already with a company, the signing of a non-competition clause should be tied to a benefit, such as a raise in pay or a promotion.
3) Business interests
The employee’s activities, which are affected by the clause, must be related to a legitimate business interest that your company wants to safeguard. Legitimate business interests can include the protection of trade secrets, confidential information, customer relationships, goodwill, or unique skills. Non-competition clauses that are simply designed to thwart competition are less likely to be upheld.