Non-compete agreements have been the subject of a litany of litigation around the country. They are one of a variety of different types of what’s called a restrictive covenant, which could also include non-disclosure agreements and non-solicitation agreements. It is common for a single agreement to include many, if not all of these restrictive covenants. The restrictive covenant that we get the most questions about is the non-compete agreement.
A non-compete agreement is a contract that prohibits an employee from entering into competition with the employer during or after employment. A business can also enter into a non-compete agreement with independent contractors. The level of restriction that is permitted depends on state law, and each state is different.
As a business owner, it is important to have a properly drafted non-compete agreement in place to protect your business if an employee, or a partner, leaves to work for a competitor. You may have your employees or contractors sign a non-compete to protect yourself against a former employee or consultant revealing secrets or sensitive information about operations, clients, customers, pricing, strategy, marketing plans, and using it to compete against you. As an employee, contractor, or business partner, it’s important to understand how a non-compete will restrict you if you end up separating from your employer or business.
A non-compete agreement should be fair and equitable to both parties. Among other things, non-compete agreements must be reasonable in geographical region, duration and scope. Each state has different standards regarding what is acceptable and enforceable. A non-compete cannot permanently prevent an individual from furthering their career in a certain field. Many courts have adopted a very conservative approach to enforcement of non-competes because they can restrict a person’s ability to earn a living.
In some states, like California, they are not enforceable. On January 11, 2021, Washington, D.C., enacted the Ban on Non-Compete Agreements Amendment Act of 2020, which will create a near-total ban on non-compete agreements in Washington, D.C.
Other states, like New York, will enforce a non-compete only if it meets a certain standard and will look at factors such as the geographical limitations and duration. Legislation has been introduced, however, that would limit the use of non-compete clauses and protect workers who lose their jobs due to an emergency situation. The bill also contemplates a liquidated damages provision of up to $10,000.00.
More and more states have introduced legislation to either completely ban non-compete agreements, or severely limit them to very specific circumstances. In Illinois, for example, effective January 1, 2022, the Illinois Freedom to Work Act will be amended to provide additional limitations to non-compete and non-solicit agreements. Non-compete agreements will be banned for employees earning less than $75,000 annually, and that annual salary threshold is set to increase incrementally over time. Non-solicit agreements will similarly be banned for employees earning less than $45,000 annually.
In May 2021, a bill was introduced in New Jersey that would limit non-compete agreements to terms not exceeding one year and provide touchstones for the reasonableness of a restrictive covenant, as well as procedural requirements. If passed, non-compete agreements would be prohibited against “low-wage employees” and employees whose employment was terminated without cause. The New Jersey bill also contemplates liquidated damages of up to $10,000.
We have been on both sides of a non-compete – as counsel for the business owner, and as counsel for the employee/business partner trying to avoid enforcement. Based on our experience, we have learned that it’s important for both sides to understand their non-compete agreements.
Therefore, before you sign an agreement that contains a non-compete provision, if you are a business owner, make sure it’s drafted appropriately so that it protects your business accordingly and should you need to enforce it one day, it will be enforceable. Ask questions such as, is it limited to a specific geographical location? Is it limited in duration? What exactly are the restrictions against the employee/contractor/partner?
As an employee or business partner entering into an agreement that contains a non-compete, make sure you understand what the restrictions will be if and when you leave.
If you have any doubt about what you are signing, get advice from an attorney who is familiar with non-compete agreements in your state. It’s worth it to protect yourself and understand what you are agreeing to!
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.
