And just this month, the FTC held a workshop to explore an FTC rule that would significantly limit or perhaps even eliminate the use of workplace non-compete clauses in employment agreements or standalone restrictive covenant agreements.
These types of clauses are usually found in or are ancillary to employment arrangements or as part of a contract with a service provider. Additionally, non-compete clauses can be part of a sale or business transaction, serving to prevent the seller of a business from competing with the purchaser for a period of time following the closing of the sale.
Non-compete provisions can be used to protect valuable corporate assets, such as trade secrets, intellectual property, proprietary information, and business goodwill. The enforceability of non-compete clauses is governed by state common law.
In addition, many states have enacted statutes governing the use and limits of such provisions. For example, in California, [1] employee non-compete provisions restricting post-employment conduct are generally void and unenforceable.
Other jurisdictions that limit the use of non-compete clauses outside of the sale of business context include those in North Dakota [3] and Oklahoma.
Finally, in a growing number of states, such as Illinois,[5] Maine,[6] Maryland,[7] New Hampshire,[8] Rhode Island,[9] and Washington,[10] employers are prohibited from using non-compete clauses with low-wage workers.
To be enforceable, a non-compete clause must satisfy contract law requirements — most importantly, being supported by adequate consideration — as well as state-specific legal requirements and analysis.
However, in certain jurisdictions, employees must be provided an additional benefit, such as additional monetary consideration e. Other jurisdictions require a threshold period of employment before a non-compete provision can be enforced. As a general matter, non-compete agreements entered into as part of a sale of business transaction are subject to a much lower level of scrutiny than those arising in the employment context.
Temporal reasonableness is generally determined by evaluating the unique facts of each case. A handful of states, including Utah [11] and Massachusetts,[12] have enacted statutes that set out temporal limitations regarding reasonable durations.
Further, other states, such as Florida, [13] Georgia,[14] and Washington,[15] identify durations that are presumptively reasonable ranging from six months to two years. In terms of the geographic scope of a non-compete clause, reasonableness is generally determined by the locations where the company conducts business.
Overall, the enforceability of a non-compete clause ultimately will depend upon the governing jurisdictional law and the specific facts of each case. In particular, state attorneys general have aggressively pursued actions against fast-food restaurants and other national chains for their use of non-compete provisions with their more rank and file employees.
Certain states, like California, have a history of not recognizing or enforcing non-compete clauses, but now a coalition of state attorneys general are urging the FTC to ban the use of non-compete clauses in employment agreements on a national level. In early January, the FTC held a public workshop to examine whether the FTC should promulgate a rule to restrict the use of non-compete clauses in employer-employee employment contracts.
Notwithstanding their different positions, both commissioners cited federal and state legislative policymaking over non-competes. Among those efforts is a federal bipartisan bill — the Workforce Mobility Act — introduced by Sens. Chris Murphy D-CT and Todd Young R-IN , which would eliminate the use of non-compete clauses in employment agreements, with certain exceptions for partnership dissolutions and sales of businesses.
Employers should take note of the current policy debate and enforcement climate related to non-compete covenants in the labor market. We recommend careful consideration of the need for including them in any current or anticipated employment agreements to mitigate the possibility that such provisions would be declared unenforceable or attract civil or criminal enforcement actions. The following practical tips can help mitigate antitrust risk.
When considering the use of non-compete clauses in employment agreements outside of the sale of business context, ask yourself the following questions:.
Employees negotiating a non-compete contract with their employer should only agree to terms that are actually necessary to protect the employer's interests. The employee if you're on good terms with the employer, discusses the non-compete agreement and come to a confidentiality agreement. Upconsel can help give advice to your employee rights. It is important to get an attorney to analyze your contracts to answer questions you may have.
Non-compete agreements should be reviewed by legal counsel to ensure the employee is safe. This area is where a lawyer will be necessary for more information and contact an employment attorney for advice.
You may lose money along with the job you currently have. Please keep in mind this guide does not constitute legal advice and should be taken as informational only. Additionally, this guide is intended to give a general overview of state laws and will not contain highly detailed information about each state. Each state may have additional factors it considers in the enforcement of Non-Competes.
As mentioned above, it's always a good idea to contact an attorney in your specific state for any questions you may have. First thing's first, though, before we move on, let's talk about what a Non-Compete specifically is and what its purpose is. A Non-Compete is a document generally used by an employer to ensure that during the course of an employee's employment and after they leave, they do not engage in direct competition with the employer for a certain time and in a certain geographic location.
The restriction on the competition can take one of many forms, depending on what the employer is specifically concerned about. Often, non-competes restrict the employee or former employee from working with direct competitors, taking customers with them, or hiring staff out from under the employer. They may also restrict the employee from utilizing information that belongs to the employer, such as client lists, customer contacts, strategy documents, etc.
Generally, this type of information is protected in a Non-Disclosure Agreement, but there can be similar clauses in a Non-Compete. As discussed above, Non-Compete laws vary on a state-by-state basis. Some states are more lenient in their treatment of allowable Non-Competes and others are more strict.
That being said, however, there are other states that don't permit Non-Competes at all. Although this is the exception, rather than the rule, it's important to know if you are in a state that bans Non-Competes.
What state's law is applicable will either be dependent on the text of the proposed Non-Compete like through a choice-of-law provision, for example or the circumstances of the employment relationship.
Most often, if a choice-of-law provision is not included within the agreement, the state where the employer is based will govern.
According to Ala. In Alabama, Non-Competes are generally valid, as long as the employer is protecting trade secrets, confidential information, business contacts or relationships, goodwill in business or marketing, or specialized training. The Non-Compete can restrict these activities for up to two years and will be considered reasonable.
Anything beyond that may start to look unreasonable to a court of law. An important exemption to note: Alabama will not enforce Non-Competes against professionals, like doctors, lawyers, accounts, etc. In Alaska, although Non-Competes are not favored by courts, they are permitted, as long as they are narrowly tailored and reasonable with regard to the restrictions, and they are trying to protect a legitimate interest of the employer.
The court will look at several additional factors surrounding the details of the employment relationship, as well. In Arizona, Non-Competes are generally enforceable , as long as they are not broader than necessary to protect a legitimate interest of the employer and are not unreasonably restrictive in both time and scope for the employee.
They also must not be against public policy. Importantly, physicians in Arizona are exempt from having Non-Competes enforced against them. According to Ark.
Code , Non-Competes are enforceable as long as they are " limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer.
Certain professionals are exempt. In California, except in very limited circumstances, Non-Competes which restrict what the employee can do after the employment has ended are not permitted found in Cal.
In general, in Colorado Non-Competes are not permitted unless they fall into one of four specific exceptions Colo. Other than this, Non-Competes in Colorado are generally void. Physicians are exempt from having Non-Competes enforced against them. Non-Competes in Connecticut will be permitted as long as they are reasonable.
To determine what is reasonable, a court will look at the Non-Compete's geographic reach, time, scope, how much it restricts the employee, how fairly it protects the employer, and whether it is against public policy. Broadcasters are exempt. In Delaware, Non-Competes are only enforceable if they are reasonable with regard to time and geographic scope and if they protect a legitimate interest. Physicians are exempt. The court will look at the hardship the restrictions pose on the employee versus the legitimate protection required to the employer.
According to Fla. Mediators are exempt. In Georgia, Non-Competes are enforceable against four categories of employees : employees that solicit customers for the employer, sales staff, managerial staff, and "key" employees.
As with many other states, the restrictions in time, scope, and geographic reach in the Non-Compete must be reasonable and not overbroad. The court will look at public policy and weigh individual concerns of being free to earn versus commercial concerns of needing to protect a business.
In Hawaii, under Haw. In Illinois, Non-Competes must go along with an employment relationship and be reasonable in their time, geographic reach, and scope restrictions , not pose too great a hardship on the employee, and not be against public policy. If so, they are generally enforceable. However, there are a number of exemptions, including low-income workers.
Physicians, broadcasters, and government contractors are also exempt. In Indiana, Non-Competes are generally enforceable, as long as the restrictions as to time, geographic reach, and scope are both reasonable and specific. Indiana does not allow general, boilerplate Non-Competes.
The court will look at the legitimate interests that need to be protected versus the impact on the employee, as well as the public interest. This essentially limits their capacity to earn an income. Also known as a nondisclosure agreement, confidentiality agreements ensure that the independent contractor does not share any proprietary information nor company secrets learned during their engagement.
Some non-solicitations also prevent the contractor from hiring company employees. It does not belong to the contractor. However, if your company does require non-competes for independent contractors, make sure you have a thorough understanding of the local laws in the country where the independent contractor is providing services so you can mitigate or avoid potential legal issues later.
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting or refraining from acting on the basis of any information provided on this website. Oyster is a distributed HR platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving distributed workforce.
It lets growing companies give valued international team members the experience they deserve, without the usual headaches or the expense.
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