Dealing with Non-Competition Agreements – from Both Sides

Every employer has experienced resignation by a valuable employee who has received an offer from a competitor that he or she “can’t refuse.” Employers are responding to this scenario, which is happening more frequently as the workforce is becoming more mobile, with increased use of non-competition agreements. Being asked to sign a non-competition agreement makes employees stressed and anxious, because signing a non-competition agreement potentially impairs their ability to earn a living. This overview addresses key aspects of non-competition agreements from both the employer and employee perspective.

A “non-competition agreement,” or “non-compete” for short, means a clause in an employment contract or a stand-alone written agreement that bars an employee from working for a competitor for a stated period of time, in a stated geographic region, after the employee’s employment ends.

Historically, non-competition agreements were only requested from and signed by key high level executives or salespeople. But in recent years, the trend has become for employers to ask more and more of their employees to sign non-competition agreements. For example, Jimmy John’s sandwich chain recently received nationwide attention due to a lawsuit filed against it that challenged a non-competition agreement that Jimmy John’s required all employees to sign. The Jimmy John’s non-compete prohibited the employee from working for a competitor – defined as any business that obtains at least ten percent of its sales from sandwiches and is located within three miles of any Jimmy John’s outlet – for a period of two years following the employee’s departure from Jimmy John’s.

An Illinois judge threw out the relevant part of the lawsuit in April, 2015, on technical grounds. Notwithstanding that Jimmy John’s won on a technicality, it lost in the court of popular opinion – there was a public outcry over the perceived unfairness of the Jimmy John’s agreement. In response to this and other aggressive use of non-competes, a bill was introduced in Congress in July 2015 to prohibit employers from requiring low-wage employees to enter into covenants not to compete, among other protections.

For an employer, a non-compete – if the employee will sign it – is a no-lose proposition. At worst, the non-compete is unenforceable (enforceability of non-competes is discussed below) and, at best, the non-compete is effective in keeping a valued employee from being wooed away by a competitor. Keeping employees out of the hands of competitors also helps to protect the employer’s know-how and trade secrets. On the other hand, most employees would rather not sign a non-compete, and agree to it only because they see no other option. Thoughtful employees, however, seek to negotiate aspects of the non-compete before signing.

As an initial matter, the law tends to disfavor any restraint on a person’s ability to obtain employment, and so non-competition agreements are narrowly construed by courts. The enforceability of non-competition agreements is a generally a matter of state law, and the states vary in what is required in order for a non-compete to be enforced. California, at one extreme, essentially prohibits the use of non-competition agreements in an employer-employee relationship. Unlike California, most applicable state laws will enforce employer-employee non-competes, but require that the employee be given “consideration” – something of value – for the non-compete.

Agreement to employ a person is usually in and of itself sufficient consideration – so employers often require the desired non-compete as a condition of employment. A bona fide promotion or significant raise can also be consideration, as can a significant amount of money or something else of meaningful value.  Also, many state laws require that a non-compete must be reasonably tailored to protect the interests of the employer without overly restricting the employee. This means that the scope of the restriction and the time period of the restriction must be as narrow as possible to protect the employer, without imposing undue hardship on the employee or injuring the public. It is a delicate dance, and each case is very fact-specific.

Another important aspect of the non-competition agreement is defining when it is triggered. Is the restriction on working for competitors triggered anytime the employee terminates for any reason, or only when the employee quits (as opposed to being fired)? What about if the employee is fired for cause? What if the employee terminates voluntarily because he or she received a demotion or cut in pay?

Employees should not be shy about seeking to negotiate the terms of non-competition agreements. An employer who wants to appear fair is hard-pressed to resist a request that the non-compete agreement only applies if the employee quits or is terminated for cause. While the employer may resist on the grounds that defining “cause” is tricky, “cause” is a common concept and one that can be drafted fairly with thoughtful input from both sides. One or more post-termination payments from the employer to the employee during the non-compete period serves to strengthen the employer’s argument that there is consideration for the non-compete, and serves a practical purpose also: a well-written agreement will allow the employer to cease making the post-termination payments (as well as seek other damages) if the employee breaches the non-compete. This provides an incentive to the employee to comply with the agreement.

Another important, often-overlooked provision that should be spelled out in the agreement is language that extends the length of the non-compete by any period of non-compliance. For example, if an employee is subject to a non-compete that applies for a year following termination, and then breaches the non-compete by working for a competitor for six months before being forced to stop, the period of the non-compete would be increased by the six month period of breach.

In sum, non-competition agreements are increasingly a part of employment contracts and employment at will, and employers and employees must learn to deal effectively with them. Employers who are not using such agreements should consider doing so in the face of a mobile workforce, but it is important for employers to create non-competes that are crafted to offer the most protection while still being enforceable. Employees should carefully read and understand non-compete agreements before signing them. If possible, try to negotiate scope and duration, and to limit the applicability of a non-compete to only certain types of terminations.

Please note that this article addresses enforceability of non-compete agreements and other legal concepts only generally – it is important to consult the author or another knowledgeable lawyer in each particular case!