When you work as a salesperson or recruiter for a company, that company invests in your ability to win them business. Consequently, any business you bring in while on their payroll belongs to them. This explains why non-competes are rising in popularity, extending into more and more occupations each year. A recent survey showed that in 2014, approximately 1 in 5 employees were bound by a non-compete clause.
There are three different stakeholders involved in the non-compete debate: the employee, the employer, and the prospective employer. And no matter which category you fall into, your perspective on the appropriate boundaries of a non-compete is bound to differ from the others. This is why it's so important to understand the context around the potential sticking points to a non-compete.
The Definition of a Non-Compete Agreement - Broadly, non-competes are contractual clauses under which an employee agrees to not enter into or start a similar profession or trade in competition against their employer or former employer.
The use of non-competes in the realm of sales and recruiting is not anything new. However, few employees understand the implications of non-competes until they leave their company and begin their job search.
Part 1 | The Anatomy of a Non-Compete:
In short, non-competes are designed to protect the employer’s investment in an employee. They minimize an employee or former employee’s ability to compete directly or indirectly with an employer. Competition may be defined as specific companies (read: competitors), or lines of business (i.e. IT recruiting), depending on the language of the contract.
Among jurisdictions that enforce non-compete agreements, each agreement is typically comprised of three parts:
The larger the geographic scope, the less likely it is a court will enforce a non-compete by its terms. Courts view large geographic restrictions as unfair to the employee, and ultimately an unlawful restraint of trade.
The more post-employment time a non-compete spans, the less likely a court will enforce it by its terms. Although time limitations vary across jurisdictions and according to specific factual situations, it is generally accepted that a 1-2 year limitation is presumably reasonable.
Scope of Prohibited Services
The more industries and service lines a non-compete covers, the less likely a court will enforce it by its terms. The reasoning behind this is similar to the geographic scope limitation in that courts generally view broadly restrictive non-competes as unlawful restraints of trade.
Courts will generally look into other factors to determine the enforceability of non-competes, including the specific industry an employee works in, as well as the relative sophistication of the parties entering into the agreement.
Part II | The 6 Things You Need to Know about Non-Competes:
1. Different states have different policies about non-competes:
California, Montana, North Dakota, and Oklahoma completely ban non-compete agreements except in limited circumstances. Hawaii bars high-tech companies from requiring their employees to enter non-compete agreements as a condition of employment. Illinois enforces them on a case-by-case basis. Canadian courts will enforce certain non-competes. You get the point. Different areas mean different rules.
2. Non-compete agreements are not the same as confidentiality agreements, nondisclosure contracts, or trade secret contracts.
Non-competes offer greater protection to employers but only for a limited time, whereas nondisclosure agreements are limited in scope, but last until the information becomes public knowledge.
3. Non-competes are subjectively enforced and the law is always changing.
Following recent outcry about Jimmy John’s use of non-competes on its sandwich makers, many states are looking to rein in their laws around non-competes. As a general rule of thumb, courts only enforce non-competes to the extent necessary to protect the employer… but, in no way does that mean individuals can rely on courts to rule in their favor. Non-competes are legally binding so long as the clause contains reasonable limitations as to the geographical area and the time period in which an employee of a company cannot compete.
4. Sometimes non-competes are unenforceable, but don’t count on it.
“It really comes down to the particular language of the agreement and the state that you’re in, because the jurisdiction that will control the enforcement of the agreement and may have laws that will make it hard to enforce in one state, whereas in another state it might actually be enforceable.”
– Russell Beck, Business and Intellectual Property Litigation Specialist
Just like in the case of Jimmy John’s, some non-competes are written to be overly restrictive and thus, unenforceable. Even still, there are a few important caveats:
When signed upon the hire of a new employee, they’re considered part of the deal of employment and are generally more enforceable. However, if they’re signed after the employee has already worked there without any benefit or payment offered in exchange, they’re unenforceable.
If there is no assignment provision in the non-compete and the company who hopes to enforce it sells their business to another party, the agreement is no longer enforceable unless the employees reaffirm their consent to the non-compete.
5. Yes, you need to mention your non-compete to potential employers.
If the non-compete is applicable to the position that you are applying for, it’s important to let your prospective employer know about it. They may be able to lend a helping hand by having their own lawyers look over the non-compete agreement to determine if it’s enforceable.
6. And if you haven’t already determined this for yourself, don’t blindly sign a non-compete.
It’s important to read through the non-compete and truly understand the scope before signing it. Even if it seems like getting hired depends on your signing the non-compete, there may be some wiggle room. It never hurts to ask questions and negotiate – it’s your career.
Conditions of departure
Note: While we fact-checked each point in this article, this blog is intended for general informational purposes only and should not be considered legal advice.