If you are an employer wondering if you should require new employees to comply with a Non-Compete provision with your business, it’s important that you understand what they involve as well as the legal requirements behind them.
Our short answer:
A “Non-Compete” or “No-Competition” provision is a clause in a contract that is meant to restrict someone’s ability to work or collaborate in a similar or same business as your company, thus, it is deemed to be a restrictive covenant. This provision is most commonly found in Employment Agreements but can be used in other agreements such as Shareholders Agreements, and Founder Agreements. This provision can take effect during the employment relationship and for a period of time after the employment has ended. Independent contractors, on the other hand, are generally not bound by this provision, since they are usually engaged in a particular business or trade and must be able to contract freely with different clients in order to earn a living.
Why should my company require this?
Companies usually use this provision to protect their legitimate interests such as trade secrets, customer lists, proprietary methodology or products. Having an employee leave their employer to go work for a competitive business could potentially mean that valuable information of their company could end at the hands of a competitor. Another reason for this provision applies to situations where an employee has an extraordinary skill or a company has incurred in substantial expense training an employee for their position. If an employee leaves shortly after their employment, this could mean that the money and resources spent on that employee could end up benefitting a rival business instead.
While these clauses are important to protect businesses, they also have to be reasonable for the employee. There are some limitations that the courts have imposed on these provision such that employees are not overburdened by the restrictions.
Generally, courts tend to favor an employee’s interest over the employer. This is because, in some way, Non-Competition provisions could limit the ability of a person to make a living. For this reason, these restrictions should be drafted in a way that protects your business and be deemed enforceable. In order to be valid, a Non-Compete provision must:
- Protect a legitimate business interest; and
- Have limited duration and geographical scope;
Protect Legitimate Business Interest
A Non-Compete provision may be used to prevent a former employee from capitalizing on your company’s confidential information and using it to their advantage to compete with the your business. The disclosure of certain information that could potentially damage your business and have an impact on its income and future revenue of your company are likely to be considered “legitimate business interests.”
Realistic Duration and Geography
A Non-Compete provision must be reasonable in both (a) duration and (b) geographical scope. The “reasonableness” aspect depends on the facts of each unique situation. A limitation on duration means that the restriction cannot be for an extended period of time. In most cases, the duration of a Non-Compete provision cannot be longer than 2 years. The average duration usually ranges from 6 months to 2 years.
On the other hand, a limitation on geographical scope means that the restriction cannot limit the employee from competing in an extended area. For example, a Non-Compete provision may not restrict employment in a competing business in the “State of New York”, “the United States”, or “throughout the world.” A reasonable limitation is usually limited to a neighborhood, a part of a State or a number of miles from the employers’ location or main headquarters.
A Non-Compete provision that extends for a long period of time or covers a excessive geographical area would most likely may not be considered enforceable.
The Bottom Line
As an employer, you have every right to protect your company, but keep in mind employees also have the right to earn a living. Making sure both of your interests are balanced when creating an agreement will be key to its success.
If you still have questions regarding Non-Compete provisions, we recommend reaching out to an experienced corporate attorney for advice. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.
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This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.