| Employers in highly competitive industries often require their employees to sign covenants not to compete, or non-compete clauses, when they are hired. Usually such covenants provide that if the employee leaves his or her employment, he or she will not go to work for a competitor within a certain period of time. Some agreements also require that an employee will not contact the employer's clients upon his or her termination or that the employee will not go into his or her own business to compete with the employer.
Often, employers insist upon covenants not to compete where:
- The employee will be provided with a significant amount of employer-sponsored training,
- The employee will acquire knowledge or skills during his or her employment that could be used to compete with the employer,
- The employer is investing a large amount of money to lure the employee to the job, or
- The employee will be developing close relationships with clients.
State contract law controls the enforceability of a covenant not to compete. Thus, the rights of employers to require employees to sign such agreements vary from state to state. Although California has banned nearly all covenants not to compete, such covenants are generally enforceable in other states, even though they are not "favored" by the law. The law does recognize that employers often have a legitimate need to protect themselves and their trade secrets.
In order to be enforceable, a covenant not to compete must be "reasonable." A covenant may be found unreasonable in multiple ways:
- The restriction is for too long of a period of time after the end of employment,
- The covenant restricts too large of a geographic area,
- The restriction is too broad in scope, preventing an employee from working in a capacity that will not cause any harm to the employer, or
- The employer has no legitimate business interest in enforcing the covenant.
If a portion of a covenant not to compete is found to be unreasonable, courts in most states may choose to enforce the rest of the covenant, if it is reasonable. To increase the chances that a court will enforce the reasonable portion of such a covenant, employers may wish to include a provision stating that if one portion of the agreement is found to be invalid, the balance will still be enforceable.
In order to be enforceable, a covenant not to compete must also be supported by adequate consideration. Generally speaking, adequate consideration will be found if an employee signs the covenant at the time he or she is hired or at the time he or she receives a large raise or promotion. Courts generally refuse to find adequate consideration if an employer suddenly requires an employee to sign covenant not to compete without offering the employee any new benefit in return.
If a covenant not to compete is found to be enforceable, courts may enjoin a former employee from violating the covenant. An employer may also ask a court for monetary damages in cases where an actual loss can be proven. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |