Non-Compete Agreement: Three Rules Employers Should Keep In Mind
Santomassimo Davis Legal Alert
30 million. That’s the number of American workers who work under non-compete agreements, according to the Office of Economic Policy U.S. Department of the Treasury.
But employers be forewarned: Many of those non-competes could be deemed unenforceable in the near future, predicts William I. Greenbaum, an attorney at Santomassimo Davis LLP Outside General Counsel™ Solutions, a New Jersey-based firm with offices in Philadelphia and New York.
“The pendulum has swung against the enforcement of non-competes,” he says.
One big reason: President Joe Biden has said that his administration will work to minimize the use of non-compete agreements in employment agreements. In his Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, the President pledges to work with Congress to eliminate all non-compete agreements except the very few that are “absolutely necessary” to protect a narrowly-defined set of trade secrets. And, he’s vowed to completely ban no-poaching agreements, which are commonplace among franchise companies.
Here’s a second reason: As the coronavirus pandemic continues, “the fact that people are finding it harder to find jobs or they’re out of work because of the COVID economy will make it difficult to enforce non-competes,” Greenbaum says. “Many courts will sympathize with the employee’s situation and be reluctant to keep them from collecting a paycheck.”
That said, companies in most states still use non-compete agreements to protect legitimate business interests, customer information and trade secrets. Greenbaum said he counsels a few clients in industries where, if a top executive were to jump ship and join a competitor, “the financial cost to the company would be devastating.” In such cases, Greenbaum helps the client draft narrowly-focused agreements that are specific to certain employees and situations. “The key is to tread lightly,” he says.
Greenbaum’s three rules employers should keep in mind when drafting non-compete agreements:
- Limit their use. “I’ve seen companies go overboard by including an automatic non-compete provision in every employee contract,” Greenbaum says. “That’s not a good thing.” Non-competes are much less enforceable against people in a company who don’t have specialized knowledge or access to proprietary information, he says. And courts across the country are increasingly refusing to enforce non-competes against lower-wage employees in particular.
- Keep geographic limits narrow. Some employers include restrictions in a non-compete that prohibit an employee from competing with their previous employer or soliciting clients that were doing business with that employer in a specific location. As a rule, “the more narrow the geographic location, the more enforceable” the contract will likely be, Greenbaum, says. Alternatively, “prohibiting executives from doing business ‘worldwide’ or ‘in the entire country’ isn’t likely to fly.” Also, work with your legal counsel to check the rules for the state whose law is most likely to apply to the agreement. Some states, including California, Montana, North Dakota, and Oklahoma, completely ban such agreements, while other states restrict them in different ways.
- Limit the duration. Non-competes tend to be more enforceable if they restrict a worker’s employment for a short amount of time. “I don’t like any non-compete that’s longer than a year,” Greenbaum says. In addition, he recommends that employers pay employees severance for all or most of the non-compete period. “Courts are not very inclined these days to make a person stay out of work with no compensation or livelihood,” he says.
The upshot? “Non-competes are a balancing act between the needs of the company versus the fairness to the employee,” he said. “Your very best bet is to be reasonable.”