The Non-Compete Agreements
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Published: Wed, 13 Sep 2017
Most formal employment arrangements require a non-compete agreement which prohibits employees from competing with employers or working for a competitor after a defined period and within a specified geographic area upon termination of the employment contract (Garrison et al. 113). Notably, these agreements can be enforced in a court of law if it meets the set thresholds that protect the best interest of both the employer and the employee. In the past, such restrictive covenants were meant for high-ranking executives since they had access to vital information regarding the business or the company (Younge et al. 670). However, advancement in technology among other factors has necessitated the need to engage employees at all levels into such restrictions. This write-up will examine the circumstances under which the non-compete agreements are enforceable and when they are not.
Circumstances when Non-compete Agreements are Enforceable and when they are not
The enforceability of the non-compete agreement is determined by the nature of employment (Samila & Olav 430). In this case, two factors are considered. First is the extent to which an employee has access to the confidential information of the business such as customer lists or trade secrets. The second aspect is whether there is a protectable interest on the part of the employer. Therefore, the restrictive covenant will be enforceable when the employee has access to the secrets of the business. In most cases, employees in top ranking positions such as the president of sales and operations have access to vital and confidential information such as the list of customers (Younge et al. 703). It implies that when they open a directly competing business or go to work for a competitor after terminating an employment contract, then they will put at risk the legitimate interest of the former employer’s business. In such cases, the agreement will be enforceable.
On the other hand, the scrutiny of enforceability will involve other legitimate protectable interests of the employer. They might include the nature of employee’s relationship with the customers and whether the information at stake has any competitive impact on the business regarding pricing (Garrison et al. 695). It implies that the agreement will be enforceable if the employee had personal contact with the customers. Moreover, when the information that the employer is seeking to protect is current, and there is interest in winning back the customers, the restrictive covenant will be enforceable. Also, in cases when the information will create a competitive difference in such aspects as the price of commodities and customer needs, then it is deemed reasonable enough to protect the employer.
However, non-compete agreements are not considered enforceable when the nature of employment does not allow the employee access to confidential information (Samila & Olav 431). In cases, when low-level employees who do not have vital information that can impact on the competitiveness of the business, the terms will not be enforceable in a court of law. Other instances where a non compete will not be enforceable are based on the legitimate protectable interests that are based on outdated information which has no significance to the business. Additionally, when the customer in question does not constitute a current client of the employer, and the company has not expressed enough proof of its intention to winning back that customer, the restrictions may be considered unreasonable.
The second circumstance that can influence enforceability is the length of time of the non-compete agreement (Garrison et al. 160). Non-compete agreements should involve restrictions based on a reasonable period which will depend on the nature of the business. There should be a considerable period upon which the former relationship between the employee and employer’s customers are wiped out. However, no particular period is applicable to all cases. In some cases, one year is considered a reasonable time while in others two years would be considered reasonable, again depending on the nature of the business. Therefore, when such restrictive covenants specify a period that is agreeable to a court of law, then it will be enforceable. It implies that before the lapse of the agreed period an employee cannot open a directly competing business or work for a competitor. However, in case the restrictions lack specificity in regards to a specific period then they cannot be enforced as they are. Notably, the court can modify the agreement or simply consider it invalid.
Another factor that is envisaged for the enforceability of a non-compete agreement is the geographic location where business is conducted (Garrison et al. 142). In such instances, the analysis is based on the region that the employee had sold the employer’s products. It also involves the specific activities that the employee undertook within the period of appointment including their access to former customer lists. Furthermore, consideration is also given to the scope of the business. To validate such restrictive covenants by territory of the operation, the court must determine whether the limitation is reasonable. For instance, when the agreement involved the geographic location in which employer does business then it is considered reasonable (Garrison et al. 143). It is because the employee will likely have access to the list of customers and will pose a threat to the legitimate interest in the business of the employer.
On the contrary, the non-compete agreement may not be enforced when it is deemed unreasonable by the court of law given geographic location (Garrison et al. 127). Invalidation with regards to geographic limitation includes instances in which the restrictions go beyond the scope of the former business. It means that when territorial limits include areas where the employer has no business interest, then it is considered unreasonable and cannot be enforced. Therefore, companies are obliged to draft agreements that have reasonable geographic limitations. Notably, more concern is due to the effects such restrictions have on the business. Therefore, besides mere physical location, there is a need to develop the restrictions for areas of operation and the customers’ location (Younge et al. 700). Restrictions that encompass broad geographic regions or those without limitation on their coverage are not enforceable.
Whether the covenant restrictions are oppressive to the employee also determines its enforceability (Garrison et al. 120). It has been discovered that most employees would accept the non-compete agreement to secure job opportunity even when the terms are harsh to them. Employers use such restrictions to gain an economic advantage over the employee by denying them further opportunity to work in their various areas of specialization. As a result, courts have the responsibility to determine the language used in drafting the non-compete agreement and whether it is unduly harsh on the employee. Several factors such as economic conditions of the employee, their education, age, and the impact of the restrictions on the freedom to exploit one’s skills are considered. Therefore, when the covenant restrictions prompted the employee to give up their rights to working anywhere else in the marketplace, then they are considered unenforceable. Moreover, when it is detrimental to career development and prevents the employees from utilizing their skills it can also be regarded as unreasonable (Younge et al. 689). Conversely, if the restrictions are favorable to the freedom of the employee and accord them the prerogative to advancing their skills and working in the various fields of specialization, then they are enforceable.
Other circumstances that determine the enforceability of non-compete agreements include consideration as well as public interest (Samila & Olav 428). Consideration refers to what an employee stands to gain by agreeing not to compete with the employer. In such cases, the restrictions are signed after an offer of some privileges such as promotion, job security or other responsibilities beyond the current employment. A court of law can authorize a non-compete agreement provided a consideration even without evaluating the sufficiency of the terms. On the contrary, such restrictions that are not based on consideration are viewed as unreasonable. Moreover, the restrictive covenant should be implemented in the best interest of the public. It implies that it should not be aimed at establishing a monopoly by creating a shortage of essential services. Therefore, when a court of law ascertains that the agreement does not result in a lack of certain services then it can be validated (Samila & Olav 429). However, when it leads to violation of public policy through the creation of unnecessary shortages, then it is not enforceable.
It is evident that the non-compete agreement is a typical case law that is determined based on facts and circumstances at hand. Some of the outstanding factors as expressed include the nature of employment in which enforceability will be determined based on the level of access to confidential information. Moreover, geographic location is also vital to avoid unfair competition in cases when employees directly compete for business after termination of the contract. On the other hand, the period in regards to when the contract ended is considered in which case most restrictions are valid for up to two years depending on particular circumstances. Other aspects such as consideration, impacts of the limitation on the employees’ freedom to utilize his or her skills as well as public interest determine the enforceability of the restrictive covenants as explained. Therefore, non-compete agreements should be drafted in the best interest of both the employer and the employee to avoid a breach of the accord which can attract charges in a court of law.
Garrison, Michael J., and John T. Wendt. The evolving law of employee non-compete agreements: recent trends and an alternative policy approach. American Business Law Journal 45.1 (2008): 107-186.
Samila, Sampsa, and Olav Sorenson. Non-compete covenants: Incentives to innovate or impediments to growth. Management Science 57.3 (2011): 425-438.
Younge, Kenneth A., Tony W. Tong, and Lee Fleming. How anticipated employee mobility affects acquisition likelihood: Evidence from a natural experiment. Strategic Management Journal 36.5 (2015): 686-708.
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