Disputes between businesses and former employees often result when former employees engage in competition with their former employer. In the absence of an agreement restricting employment after an employee resigns or is terminated, the employee is free to work anywhere, even with a competitor. An agreement that restricts later employment is called a covenant not to compete or a noncompete covenant.
An enforceable covenant not to compete must be: (1) in writing; (2) made a part of the employment contract; (3) based on valuable consideration; (4) reasonable as to time and territory; and (5) designed to protect a legitimate business interest of the employer. If the covenant does not meet any single requirement, it becomes unenforceable.
In Writing
An oral agreement not to compete is not enforceable. While there is no particular form for the covenant, it must be written and signed by the employee.
Part of the Employment Contract
This requirement is often the source of problems with non-compete covenants. If the agreement limiting employment with a competitor was entered into after the employee began work, and the employee did not received a promotion, bonus or increase in salary the time the contract was signed, courts have held that the agreement was void because it was not part of the employment agreement. However, one case has held that an oral agreement for a non-compete employment contract that was later reduced to writing after the employee began work is valid. Needless to say, it is a much better practice to enter into written non-compete agreements prior to the beginning of employment to reduce the possibility of litigation.
Valid Consideration
The employee must receive something of value for agreeing to limit his/her employment opportunities. The promise of new employment is valid consideration and is the most common consideration when negotiating with a prospective employer or employee. If entered into after employment has begun, new consideration must be paid to the employee, such as a bonus, raise, vacation or other benefits.
Reasonable Time & Territory
In determining whether a particular provision is reasonable, courts commonly look at six factors:
(1) the area, or scope, of the restriction; (2) the area assigned to the employee; (3) the area where the employee actually worked or was subject to work; (4) the area in which the employer operated; (5) the nature of the business involved; and (6) the nature of the employee’s duty and his knowledge of the employer’s business operation. A covenant restricting a former employee who had little interaction with customers outside of a small geographical area from working with a competitor in another state might be viewed as unreasonable. Similarly, a former high ranking executive with vast knowledge of the business and contacts throughout the United States may be subject to much broader restrictions.
Legitimate Business Interest
Covenants not to compete must be closely related to the legitimate business interests of the employer. For example, a plumbing supply company may not restrict a former employee from working for a general contractor. A business that sells exclusively in one state or region may not restrict a former employer from working in the same type of business outside that state or region under most circumstances.
Non-Solicitation Agreements
Non-solicitation agreements are different from, but closely related to, covenants not to compete. These agreements prevent a former employee from soliciting customers and employees of the former employer. In general, these agreements can be broader in time and territory than covenants not to compete.
The best time to seek legal advice regarding a covenant not to compete and non-solicitation covenant is when the agreement is being negotiated. Our Business Dispute Lawyers are able to understand the legitimate business interests the employer needs to protect as well as the need for an employee to have broad employment options when the employment relationship ends. We follow decisions of the appellate courts regarding covenants and draft such agreements with the goal of preventing or reducing litigation in the future. Contact Bill Cannon today for more information about covenants not to compete and non-solicitation agreements.