What kinds of non-competition agreements can a business enter with employees?
Employers often ask employees to enter non-competition agreements, or “non-competes,” sometimes as a matter of course on the first day of employment. Most states allow such agreements, but subject them to certain conditions designed to limit the burden on employees. (A handful of states ban employee non-competition agreements entirely.) Where non-competes are permitted, the general rule is that they must protect an employer’s legitimate interests, be reasonable in duration and geographic scope, and be supported by valuable consideration.
A non-compete must protect an employer’s legitimate interests and cannot exist only to avoid competition. Examples of an employer’s legitimate interest include protection of trade secrets and customer goodwill. These restrictions make entering a non-compete more difficult if the employee does not have customer relationships or access to confidential information.
The scope of the non-compete must be tailored to the employer’s legitimate interest. It cannot restrict the employee for a longer time, or in a broader geographical area, than the employer’s interest requires. Most states limit employee non-competes to time periods of two years or less, although the law varies depending on the jurisdiction. The employer’s legitimate interests also determine the territory an employee non-compete can cover. A nationwide restriction, for example, may be enforceable only if the employer (and potentially the employee) operates throughout the country.
An employer also generally must provide valuable consideration in exchange for a non-compete. An offer of new employment, a raise, or a bonus will generally suffice. Where an employee already works for an employer, however, court in different jurisdictions have divided on the issue of whether continued employment is enough consideration for a non-compete, or if another benefit, like a cash bonus, must also be provided.
Non-competes help protect a business’s proprietary information, customer relationships, and goodwill. But failing to properly tailor non-competes can render them unenforceable. Employers should thus consult with counsel to avoid pitfalls and ensure that non-competes serve their intended purposes.
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